INFLATION UPDATE ISSUE 012 NOVEMBER 2012 NAMIBIA
Chart 1: Overall inflation Source: NSA and BON The latest official release by the Namibian Statistics Agency indicates that the annual rate of consumer price inflation (CPI) increased from 6.7 percent in September, to 7.1 percent (year on year) in October. This second consecutive spike in the CPI figure reaffirms our expectations that inflation is beginning an upward trend which is likely to persist into the new year, after bottoming out in August, as cost push pressure is starting to translate into higher domestic prices. The inflationary trend has reversed in the third quarter of the year after increasing to 6.7 percent in September from 5.8 percent in August, subsequently increasing at an even faster rate in the month of October (month on month inflation in October was 1.1 percent compared to the monthly increase of 0.8 percent in November). October will be remembered as a particularly volatile month for domestic prices, especially those of imported products, following the transport strike that took place in South Africa for the first half of October which affected the consistency of the supply of goods to retailers, notwithstanding the other cost push factors which are driving the overall price level higher.
Chart 2: Food price inflation Source: NSA Food and non-alcoholic beverages carries the largest weighting of all the categories in the consumption basket (at 29.6 percent), and as such any increase in food price inflation will have a significant bearing on overall inflationary pressure. Following a substantial increase in September to 9.2 percent from 7.3 percent in August, food price inflation has ticked up even further in October to 10.1 percent (year on year). The latest increase in food price inflation was due to year on year increases recorded from September to October in all the subgroups. The categories which experienced the most significant increases in year on year inflation from September to October included milk, cheese and eggs (5.7 percent to 6.9 percent), Meat (11.1 percent to 12.4 percent) and Fruit (4.6percent to percent).
Chart 3: Bread and cereal inflation vs. yellow maize and wheat prices Source: NSA and IMF Following a significant increase in the international prices of yellow maize and wheat as a result of severe droughts affecting the world s largest grain producers in June/July this year, bread and cereal price inflation in Namibia has picked up significantly in the ensuing months, most notably September and October. Bread and cereal price inflation increased from 6.5 percent (year on year) to 11.1 percent in September, and again in October to 12.4 percent. The world food price index as measured by the United Nations Food and Agriculture Organization averaged 213 points in October 2012, down 3 points (1 percent) from September. Compared to October 2011, the FAO Cereal Price Index is 12 percent higher, mostly on a 16 percent increase in wheat and coarse grains. In a recent statement Namibia s premier maize supplier, Namib Mills, announced that consumers can expect a slight easing in maize prices towards the end of the month which could potentially provide some relief to upward spiraling food price inflation. Maize is considered a staple food for most Namibians and as such it carries the single largest weighting in the CPI consumption basket of all food products, at roughly 4 percent of the entire consumption basket.
Chart 4: Transport inflation Source: NSA Following an increase in the annual rate of transport inflation in September, October saw a slight decrease in transport inflation to 6.1 percent from 6.3 percent (year on year). Breaking down the components which make up the transport inflation figure shows that the purchase of vehicle inflation has been relatively subdued, decreasing for the fourth consecutive month in October, to 2.8 percent from 3 percent in September(year on year). The purchase of vehicles sub component carries the largest weighting in the transport inflation figure and as such has offset the relatively bullish inflation stemming from the other categories of transport inflation, namely operation of transport equipment (which is the cost of fuel) at 10.8 percent in October, as well as public transport inflation- which reached a three year high of 16.4 percent in October. The cost of operation of transport equipment, specifically fuel costs, has several second round inflationary effects including the cost of importing goods into the country as well as public transport fees and general costs associated with running a business- which is eventually passed onto the consumer. October saw yet another increase in the petrol and diesel pump prices (25 cents and 35 cents per litre respectively). This increase took place despite the fact that the price of Brent Crude Oil (rhs), decreased in the month of October from US$ 113.50 per barrel in September to US$110.2. However, in the past few months the National Energy Fund (NEF) has been carrying the weight of price increases, thus limiting the burden on the consumer. However according to the Ministry of Mines and Energy, the NEF is approaching its limit in terms of subsidizing the cost of fuel and can no longer afford to protect consumers from the volatile oil prices and exchange rate fluctuations in the coming months.
Chart 5: Goods and services inflation Source: NSA The annual rate of services inflation decreased from 7.5 percent in September to 6.2 percent in October (year on year). October saw a 2.5 percentage point increase in the annual rate of goods inflation from 6.2 percent, to 8.7 percent. This can be partly attributed to the transport strike in South Africa which affected the supply of imported goods, limiting the consistency of deliveries for retailers and thus temporarily driving up prices.
Inflation Expectation The second successive hike in the Consumer Price Index in October vindicates our expectation that inflation has bottomed out in the third quarter, with cost push pressure driving domestic prices. Looking at food and non alcoholic beverage inflation over September and October, which carries a significant weighting in the consumption basket (roughly 30 percent), would lead to suggest that the knock on effects of record high global grain prices have filtered through to the Namibian market. The recent climb in domestic grain prices, and consequently most food prices, was largely anticipated as there is a lag before high international grain prices filter into the local market. However, the upward inflation trajectory has been perpetuated by a weaker exchange rate, stemming from the recent labour unrest in South Africa which resulted in the countries sovereign credit rating being downgraded by international credit rating agencies. The consequent outflow of capital derived from increased perceived risk has resulted in a significant depreciation of the rand (and thus Namibian Dollar) against all major currencies over the last two months. As a net importing country, the inflationary consequences of a weaker exchange rate for the Namibian economy are more pronounced. An example of this is the ongoing domestic fuel price increases; between August and October the global price of Brent crude oil has dropped by 5 percent, however over this same period the price of petrol and diesel has moved in the opposite direction, increasing by 5 percent. Looking forward we foresee continued volatility in the value of the Rand and as such do not anticipate an immediate recovery in the exchange rate in the short term. Furthermore, although global grain prices have stabilized, it will take time for domestic food prices to recover as the second round effects of higher grain prices will continue to impact on other food groups such as the cost of beef. The continued cost push pressure attributed to unfavorable exchange rate developments, coupled with strong levels of domestic demand as the festive season approaches (using annual private sector credit growth of 15.5 percent in September as a proxy) creates the perfect backdrop for continued uptick of domestic inflation going into 2013.