Inflation developments: Globally and in South Africa Day Month Year 1 November 2007 Lumkile Mondi

Inflation remained relatively stable, despite the sharp rise in energy prices. Nonetheless, upside inflation risks are of some concern due to rising oil prices, emerging capacity constraints and the continued acceleration of input prices (cost-push inflation). Inflation concerns Increasing global inflationary pressures due to a steep rise in wheat prices to an all-time high. Bad crops in Canada, Argentina and Australia, whilst concerns also exist about the US wheat crop. Worldwide stockpiles plunged to a 26-year low. In China, inflation accelerated to a 10-year high on the back of rising food prices. Inflation concerns Increasing global inflationary pressures due to a steep rise in wheat prices to an all-time high. Bad crops in Canada, Argentina and Australia, whilst concerns also exist about the US wheat crop. Worldwide stockpiles plunged to a 26-year low. In China, inflation accelerated to a 10-year high on the back of rising food prices. Global inflation trends

Brent crude oil price currently at an all-time high of just over USD90 per barrel (1 Nov ’07).

The steep rise in commodity prices in recent years, higher oil prices as well as the sharp increase in food prices are of increasing concern on the inflationary front. Strong growth in global demand has kept oil and metal prices at extremely high levels for some time now. Food prices spiked sharply upward more recently due to lower than expected harvests. Nonetheless, inflation has been fairly well contained, but upside risks have emerged. In China, inflation measured 6.5% in August 2007, its highest level in 11 years (this is well above government’s 3% inflation target) – driven largely by rising food prices (particularly meat prices). Strong demand has resulted in extreme high levels of capacity utilisation. Labour market pressures (rising labour costs) are also likely to emerge in the event of lower productivity and higher compensation. Global inflation trends

At the global front, rising food prices exert increasing inflationary pressure. Global inflation trends

Higher food prices emerging in advanced economies. Global inflation trends

Food prices have risen sharply in developing economies, thereby putting upward pressure on the cost of living. Global inflation trends

Food plays an important role in the inflation basket. The impact of rising food prices in the past year is reflected in a substantial increase of food prices on overall inflation. Global inflation trends Source: IMF, WEO Note: 1 = Jan – April 2007 * CIS includes Russia, Kazakhstan, Ukraine, Georgia, etc.

In the US, producer price inflation for food and farm products have risen significantly over the past year, reflecting a poor harvest for various crops. Global inflation trends

In China, food prices have risen sharply to almost 15% in September 2007, providing increasing inflationary pressure. China’s headline CPI reached 6.5% in August 2007, its highest level in 11 years, driven primarily by this steep rise in food prices. Global inflation trends

Global economic conditions: Risks factors Rising oil, metal and food prices remain of concern on the inflationary front and pose a risk to the global economic growth outlook.

Prices at the factory gate have risen sharply over the past two years, with imported prices showing a steep rise on the back of higher global oil prices, rising international food prices recently, as well as a relatively weaker currency. Inflation trends in South Africa

A strong correlation exists between the value of the Rand and price movements of imported goods. The strengthening of the Rand more recently will absorb some of the pressure arising from the spike in oil prices to a new record high. Inflation trends in South Africa

Imported agricultural products have increased rapidly over the past two years. Inflation trends in South Africa

Imported manufactured food products increased by 20.2% in September 2007, with the price of fats and oils, as well as milk products rising sharply. South Africa is likely to increasingly import milk products in light of current domestic shortages. Inflation trends in South Africa Fats & oils

The import demand for mineral products (mainly crude oil) increased by 68% in 2006, with oil now accounting for close to 15% of all merchandise imports. Over the first nine months of 2007, the value imported mineral products has already increased by 40%, reflecting the impact of higher global oil prices as well as increased domestic demand for fuel. Inflation trends in South Africa Source: SARS Imported mineral products (crude oil & refined products) increased by 40% (Jan – Sept. ’07). Import value now stands at R78.6 bn, compared to R56.3 bn in Sept Oil imports in 2007

Agricultural food prices have risen sharply over the past two years, reflecting partly the impact of the drought at the beginning of 2007, as well as the impact of less hectares planted under maize over the 2005/06 season. Inflation trends in South Africa

Maize prices almost doubled over the past year, mainly due to the severe drought conditions experienced in many parts of the country at the beginning of the year. This is likely to feed through into higher prices such as maize meal, as well as meat products such as poultry, pork and beef. The outlook for agriculture is fairly positive due to the good start of the rainy season across the country. Inflation trends in South Africa

The price of processed food products increased steadily since mid-2005, and more particularly so the price of processed grain products. Inflation trends in South Africa

Higher producer prices eventually feed into rising consumer prices, with current stubbornly high prices at the factory gate not providing sufficient comfort for reduced CPIX inflation in due course. Inflation trends in South Africa

Food carries a weight of roughly 25% in the CPI basket, and any substantial price movement in food products therefore has a significant impact on the direction of overall inflation trends. Inflation trends in South Africa

The prices of administered goods and services has for some time now increased well above the 6% ceiling of the SA Reserve Bank’s inflation target band. Inflation trends in South Africa

Although food and fuel prices are the key drivers behind surging inflation, concern is also expressed about underlying (secondary) inflationary pressures that are mounting. Inflation trends in South Africa

A substantial deterioration in the inflation environment on the back of higher food and fuel prices. CPIX has now breached the 6% ceiling for six consecutive months. CPIX measured 6.7% in September 2007, its worst level since May 2003 (7.7%) Food prices increased by 12% in September 2007, its fastest rate in four and a half years. Inflationary pressures are likely to prevail throughout 2007, with CPIX expected to peak at 7.3% in December, before easing off during the course of next year. Secondary inflationary pressures have emerged as reflected in a steep rise in core inflation, although some moderation in the core inflation rate was witnessed more recently Core inflation stood at 5.5% in September 2007 compared to 3.9% in February this year. Inflation trends in South Africa

Food prices have risen sharply since the beginning of 2007 and have accounted for roughly 46% of the CPIX inflation rate in September Inflation trends in South Africa

Excluding the key inflation drivers, food and fuel (with a combined contribution of roughly 30% to overall CPIX), inflation stood at 4.9% in September The sharp rise in international oil prices in recent months has to some degree been countered by a stronger Rand-US dollar exchange rate. Inflation trends in South Africa

The continued high rates of growth in money supply as well as in private sector credit extension (although some moderation can be observed in household credit) does not bode too well for the immediate inflation outlook. Inflation trends in South Africa CPIX

Recently released economic data does not provide significant comfort for the inflation outlook. It is worthwhile mentioning that the two main drivers (food and fuel) behind rising inflation in recent months are largely external factors, which are not likely to be affected by higher interest rates. Nonetheless, it is the SA Reserve Bank’s objective to maintain price stability and bring inflation back into the target range. Stubbornly high producer prices also do note bode well for the inflation outlook. Should the inflation outlook deteriorate further than what is currently being expected, more rate hikes are possible. Inflation trends in South Africa

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