July 2, 2010

Zimbabwe suffers rising annual food inflation

Annual inflation increased for the fifth consecutive month to 6.1% in May 2010 from 4.7% in April.

Although inflation pressures appear to have receded over the past two months, on-month inflation marginally increased to 0.3% in May from 0.1% in April. In March, monthly inflation stood at 1.1%, representing the highest jump since dollarisation.

The historically volatile food subgroup appears to have been the main driver of inflation. The on-month food and non-alcoholic beverages inflation peaked at 2.5% in March before receding to 0.90% in April and further to 0.56% in May. Although grain production continues to improve, in 2010 the country is expected to produce about 1.3 million tonnes of staple corn which is marginally higher than 1.14 million tonnes produced last year. Compared to annual human corn consumption of 1.8 million tonnes, this year's corn deficit of over 500,000 tonnes will have to be met through imports as well as from donor agencies. The international corn price is presently around US$160 a tonne, while the local retail corn price was around US$290 a tonne as of March, US$290 a tonne in Zambia, US$268 a tonne in Tanzania and US$150 a tonne in South Africa. Ideally, Zimbabwe's food inflation which has a dominant weight of 31.9% in the CPI basket should be correlated to the country's cyclical nature of the agricultural season. The crop harvest normally runs from February through to August and food inflation should be subdued during this period. The period October to January is regarded as hunger season and often characterised with elevated food inflation pressures, particularly if the season's harvest is not sufficient to meet the country's consumption.

Worryingly, annual inflation surge appears to be on course to reach the 10% mark by the end of the year, particularly if month on month inflation is to average 0.9% for the next seven months. Other leading items that are contributing to on-year inflation include housing, water, electricity, gas, and other fuels which has a weighting of 16.2% and transport with a weighting of 9.8% in the CPI basket. Previously, food price increases have been driven in part by the firming of the South African Rand against the USD. Although the rand has been one of the most volatile currencies in the world, during the course of the past few months, the rand has been relatively stable against the USD, trading within US$7.22-7.96 range.

Expectations are that Zimbabwe's imported inflation should to some extent mimic the rand stability translating into a stable monthly inflation as opposed to recent perpetual surge that has seen monthly inflation touching 1.1% in March.

By virtue of South Africa being Zimbabwe's largest import source, the pass through effect of the rand movement to the domestic prices is huge. Since Zimbabwe is using USD as the dominant transaction currency, a stronger ZAR against USD entails increased imported inflation and vice versa.