Cost of living crisis: Six key reasons why food prices stay high despite low inflation

Despite South Africa's headline inflation hitting its lowest since October 2021, the country’s food inflation remains stubbornly high, nearly double the overall inflation rate.

This is according to the 9th Essential Food Pricing Monitoring Report from the Competition Commission released on Wednesday.

Six Key Findings:

1. Food Inflation and Load Shedding: The commission's focus has shifted to how quickly lower input costs are passed on to consumers. Slow price transmission is a sign of low competition levels in food value chains. However, the recent load shedding crisis has added a twist. The cost of adapting to these power outages is likely keeping food prices artificially high.

2. Rockets and Feathers: The report highlights the "rocket and feather" effect, where prices rise quickly with cost increases but fall slowly when costs decrease. Evidence of this effect has been found in staple foods like beef, maize meal, bread, sunflower oil, and fresh milk. However, recent studies have shown mixed results, particularly for maize meal and bread.

3. Mark-ups and Competition: The report delves into the role of mark-ups, which are added at every point in the value chain. While mark-ups are a standard business practice, the issue arises when firms with market power use events like natural disasters or supply chain disruptions as an excuse to expand their mark-ups and boost profitability.

4. Global Disruptions and Inflation: The current inflationary period has been influenced by global disruptions, from the Covid-19 pandemic to the Eastern European conflict. These events have created an environment where companies raise their margins and prices to hedge against uncertainties.

5. South African Grocery Sector: Total revenues in the sector grew by 38% since 2019. The top national grocery chains saw a 26% profit increase from 2019 to 2023. However, the constant gross margins suggest that the competitive dynamics among grocery retailers haven't changed significantly.

6. Load Shedding's Impact on Retailers: The report underscores the financial strain of load shedding on major retailers:

Pick ‘n Pay reported an additional R522 million in diesel costs in 2023.

Shoprite's South African Supermarkets division incurred R1.3 billion in load shedding expenses.

Woolworths faced R20m to R30m in load shedding-related food waste and diesel costs.

Spar spent over R700m on diesel costs in just six months.

IOL NEWS

Thu, 14 Sep 2023 15:14:10 GMTLee Rondganger

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