Food inflation is expected to start escalating towards the end of 2018, which will make it increasingly difficult for the majority of South African households to afford a balanced diet. According to the Bureau for Food and Agricultural Policy (BFAP), a range of tax factors are contributing to higher food prices.
After a wave of severe drought induced food inflation, South African consumers found some relief on the back of a rebound in crop production, with food inflation losing pace since the beginning of 2017. This was supported by low inflation and even disinflation in recent periods in bread and cereals, oils and fats, as well as fruit and vegetables. The sustained positive aggregate food inflation was, however, supported by dynamics in the meat sector. Red meat, specifically, although showing initial signs of recovery, is still experiencing the effects of the 2015/16 drought, further supported by relatively weak exchange rate levels, which in turn maintained attractive export opportunities.
In the first quarter of 2018, average meat prices were still exhibiting double-digit inflation. There is, however, a general consensus among analysts and industry experts that food inflation has bottomed out (at 3,5% in March 2018) and will begin an upward cycle supported by, inter alia, an array of tax factors that took effect on 1 April 2018. These include the increase in the VAT rate from 14% to 15% and a substantial increase in the fuel levy.
FISCAL CHANGES AND FOOD INFLATION
According to the year-on-year change in the different subcategories considered to calculate food inflation for April 2018, the rate of inflation for bread and cereals for that month was roughly -4%, meat was about 9%, milk, eggs and cheese just over 5%, fruit -8% and vegetables about 2,5%. At the time of compiling the outlook document, this was the only data available for the period following the implementation of new VAT legislation. Although it is difficult to attribute the increases exclusively to the range of tax changes, it does provide an indication of the effect of these policies on food inflation.
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