May 14, 2008
By Ethel Hazelhurst
Inflation is resisting tighter monetary policy because policy makers face "a
multiplicity of shocks of extended duration", the bank says.
On previous occasions inflation has been rooted mainly in domestic demand, and so when inflationary shocks came from abroad, they tended to come singly and were of limited duration.
The review cites global food inflation as a major reason the inflation outlook
has continued to deteriorate over an extended period.
South Africa, with food inflation at more than 10 percent last year, is one of
the countries most affected. But it fared better than Indonesia at 11.4 percent,
Hungary at 11.5 percent, China at 12.4 percent and Venezuela at 26 percent.
Japan experienced the lowest food inflation at 0.3 percent.
The UN's Food and Agriculture Organisation (FAO) figures show that global food prices last year rose 23 percent over the previous year and were up 34 percent over prices in 2005. Most seriously affected were dairy products, which rose nearly 80 percent last year, while oil seed costs rose 50 percent and grains 42 percent.
The extent of the increases was attributed to "strong Asian, Middle Eastern and African demand", supply shortages due to drought and stock disease, and increased input costs as petrol prices rose.
Quoting the FAO, the review says supply problems come at a time when global food inventories are low. "Global rice stocks, for example, are at their lowest level since 1976."
Low inventories and production disruptions are compounded by the diversion of food to biofuel production.
Oil price rises are among the shocks to the global economy. The review says crude oil at the start of November was $90 (R691 at current exchange rates) a barrel; by mid-March it had reached $108. It subsequently hit highs of more than $126, Stanlib said yesterday.
The price of Brent crude oil rose 87 percent over the past 12 months. In rand terms, the asset manager said it was up 102 percent. This calculation underscores the importance of exchange rate developments.
The review says that since the publication of the previous review in November, the rand has "depreciated markedly".
Despite the US dollar having weakened against a range of currencies, the rand
depreciated against the US dollar by about 16 percent - from R6.53 on November 1 to 7.59 at the end of last month.
In the same period, it lost about 25 percent against the euro, from R9.43 to R11.82.
Against a trade-weighted basket of 13 currencies the rand fell 17.1 percent.
The deteriorating outlook has caused the monetary policy committee to revise its inflation forecasts upwards.
At the December meeting, inflation was expected to peak at about 7.8 percent in the first quarter of this year. By January the peak was raised to 8.5 percent and by last month it was expected to top 9 percent.