A “normalisation” of food price inflation can be expected by the end of 2008 and into 2009. This is according to Citigroup economist Jean-Francois Mercier who predicts the CPIX inflation index will moderate to 9,9% year-on-year in 2008 and 4,3% in 2009, from the November 2007 year-on-year high of 13,3%. Citigroup foresees a “mild decline” in agricultural producer prices in 2008, followed by “only moderate” increases in coming years, based on medium-term projections from the Organisation for Economic Cooperation and Development.
Softening prices are predicted to result from government’s decision to limit the use of maize for biofuel production, as well as a rise in maize planting intentions and assumed weaker consumer demand, which will both likely moderate meat prices and other luxury items. However, even with these moderations, prices at retail level may not decline in the short term as retailers rebuild their margins. A normalised inflation rate would also let the Reserve Bank set rate levels “in line with traditional, demand-related factors of inflation, and enable it to shift its restrictive stance back to neutral,” said Mercier. Higher relative prices for farm products will encourage investment and production in the agricultural sector, though it’s uncertain to what extent.
Despite food prices rising significantly in the past two years, Mercier says food price projections are based on a positive outlook as no devastating weather patterns are expected, nor recoveries from trade disruptions caused by animal disease outbreaks. No significant oil price increases are expected in 2008 and 2009 and higher crude oil prices would strengthen the drive for biofuel production. – David Steynberg
Issue date: 25 January 2008
