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In the early phase of a developing price inflation, producers reduce the quality of their product, by mixing cheaper and fewer materials together so they do not need to pass higher prices on to consumers. See here, here, and here.
However, at some point, if the price inflation of input costs (commodities) persists as it is now, producers exhaust the extent to which they can reduce the quality and quantity of products offered, and they start to pass on higher prices to consumers. This is when price inflation flares up.
Grant Thornton is out with research that shows we are approaching this point in the cycle again in the food and beverage sector (F&B). According to the International Business Report, 41% of businesses expect to increase prices in the next year, compared to 12% in 2010.
The report said privately held businesses in the sector had “until fairly recently absorbed a large chunk of price rises themselves, but they are running out of capacity to do this.”
“Until now, local consumers have been relatively shielded from price increases and buyers have been in a strong position….We are, however, seeing that producers are under more and more pressure to pass these increases on to consumers,” said Ian Scott, managing partner of Grant Thornton Cape, according to Business Day.
As much as 62% of the businesses surveyed expected their revenue to increase over the next year, but only 43% foresaw a rise in profits, according to the IBR.
The report also finds that rising protectionism in SA, such as the 40%-odd tax charged on chickens imported from Brazil, and things like the proposed tax on imported cement, will compound price increases.