Price inflation

Stats SA Food Prices vs Actual Food Prices

Earlier this week, Statistics SA announced in the CPI release that food prices climbed 3.5% in December from a year ago. According to prices that we track at ETM Analytics at four major retailers in the Fourways area of northern Johannesburg, food prices have climbed around 13% annualised since March last year.

The price of raw, whole chicken is up 37% since March, and the price of a 2.5kg bag of Ace maize meal is up more than 13%. Eggs are up 12%, salt 12%, lean beef mince 11%, rice 10%, Valpre water 9%, Pronutro 9%, Coca Cola 8.3%. If you’re a fan of the unhealthy stuff, you’re in luck. Cadbury TopDeck is only up 5%, white bread is only up 2.3%, and the price of 1kg white sugar is down 3%, despite the price of raw sugar falling 20% since March.

I don’t know what Stats SA is doing with prices that they collect and go into their models, but it sure looks very different to what I’m seeing.

The Slow Decline of Zimbabwean Farming

I’ve just had the following exchange with journalist Tsidi Bishop on twitter. The bit I want to deal with is the claim that Zimbabwean farming “didn’t gradually decline, that it went overnight.”

This is not true. As Jayson Coomer and Dr. Thomas Gstraunthaler explained in a paper published in the Journal of Austrian Economics in fall 2011, titled “The Hyperinflation in Zimbabwe” (download here), the decline of farming in Zimbabwe started soon after independence in 1980. Quoting Coomer and Gstraunthaler:

In the first five years of independence, land resettlement was conducted under government’s “first option to buy” at market prices: resulting in resettlement on some 3 million hectares. Subsequently, the 1992 land Acquisition Act provided for compulsory purchase of farms, as long as the property was derelict, located on underutilized land, owned by absentee landlords, or surrounded by communal areas, and the owner had multiple farms. The act required fair compensation and provided a right of appeal (IMF Staff Report, 2000)…

Following the new pension package, the war veterans expressed discontent with the success of the previous land reform program, and began to press for its acceleration. In November 1997, President Mugabe responded to these pressures, announcing plans for the compulsory acquisition of white-owned commercial farms, again without elaboration on the financing side of the transaction (Kairiza, 2009). Thus, 1,471 commercial farms, representing a
significant portion of Zimbabwe’s commercial farming land, were gazetted for compulsory purchase (IMF Staff Report, 2000)…

At the same time, the government continued its land reform process, issuing acquisition orders in November 1998 to 841 farmers who had contested the 1997 compulsory purchases. The state also reacted to the growing influence of the trade and labor unions by imposing the Presidential Powers (Temporary Measures) labor Regulations of 1998 which imposed heavy penalties on trade unions and employers that incited or facilitated strikes, stay-aways, and other forms of unlawful collective action (Raftopoulos, 2009).

The farm invasions and expropriations continued, creating greater flight of foreign capital and declining foreign exchange earnings, prompting the government to monetise its government deficits at an accelerating rate, causing the ultimate collapse of the Zim dollar. It wasn’t until the mid-2000’s when war veterans were actually seen running around from farm to farm evicting and torching farms and farmers, which I suspect Tsidi refers to as the sudden decline of Zimbabwean farming.

Of course there’s still more to it, the rest can be read here. But to say that Zimbabwean farming declined overnight is not true.

SA Mining at “Breaking Point”; Major Rand Risk

The Zimbabwe dollar was set on the slippery slope to hyperinflation when foreign exchange earnings from the very important farming sector started going into rapid decline.

One can say that mining is for South Africa what farming was to Zimbabwe, which is why Gold Fields CEO Nick Holland’s comments yesterday that the South African mining’s “equity model is at breaking point” is of serious concern.

The South African economy is regressing. As higher order industries (mining, farming and manufacturing) contract while lower order sectors grow (wholesale and retail), SA is travelling on risky mountain road with a debt bubble at the end of it, and hyperinflation off the cliff-edge.

Pizza Perfect- and Wimpy-flation

I wrote about the price inflation of Pizza Perfect pizzas yesterday, and friend and colleague Russell Lamberti did an interview with Bruce Whitfield on the price inflation rate of Wimpy burger & chips since 1972.

Both suggest that Stats SA’s ‘official’ CPI inflation rate understates what’s really going on. Read the posts at mises.co.za, here (Pizza Perfect Price Inflation) and here (Burgerflation).

Or just listen to Russell’s interview below.

Consumer Prices Up 5.5% in June, Stock Market and Commodities Up More Than 22%

Statistics SA has just released its June consumer price index data, the annual increase of which is commonly referred to as the ‘inflation rate’.

The data finds that consumer prices only increased by 5.5% from June 2012 to June 2013.

We need to keep perspective here, as the consumer price index is a narrow measure of overall prices in the economy, and a very important form of price inflation, namely asset price inflation, is ignored.

An accurate proxy for general asset price inflation is the JSE All share index, which has risen 25% from start June 2012 to start June 2013.

JALSH

Meanwhile, raw commodity prices as measured by the Continuous commodity price index, have risen 22.2% from start June 2012 to start June 2013 (in rand terms).

CCI-ZAR

This means a couple of things. 1) The strong asset price inflation indicates there is still some consumer price inflation coming down the pipe. 2) It could indicate that Stats SA is understating the extent of consumer price inflation (not necessarily intentionally). 3) That if someone is benchmarking salary increases against consumer price inflation, his salary is going down in terms of the assets/raw commodities that his salary can buy.

More Evidence Rand Undervalued and Inflation Set to Accelerate?

On Friday, I pointed out that burger meal prices in SA are around 40% cheaper than for the same meal in the UK. ETM has been saying the rand is looking undervalued and that we anticipate an accelerating price inflation environment in SA from here. As I wrote on Friday, the much cheaper burger meal prices in SA

“may be an indication that the rand has gotten a little undervalued following the recent bout of weakness. It may also indicate that SA prices are set to ratchet sharply higher from here. Or that we will experience a combination of rand strength and accelerating inflation in coming quarters.”

On Saturday Alec Hogg tweeted that Investec bank charges are nearly 75% cheaper in SA than in the UK.

I again pointed out SA is cheap on a PPP basis. For these prices to equilibrate to some degree, SA prices could rise, UK prices could fall, or the pound could weaken and the rand strengthen (or a combination of all four). Now note Keith McLachlan just tweeted that

This happens to coincide with my expectation that SA price inflation is set to accelerate at the consumer level. What’s also interesting about it is that the rate that Investec has put its prices up has kept track with the near 18% y/y increase in the JSE All share index. Is SA about to see sharply accelerating price inflation from here?

Burger Meal Combo Prices – UK vs SA

Steers recently opened a restaurant in the UK, and a friend took this picture of the price list.

SteersUK_July2013

A King Steer combo meal costs £7.29 in the UK, which at today’s exchange rate of 15.30 rands for 1 pound sterling, equals a rand equivalent price of R111.54.

Meanwhile, in SA, a King Steer combo meal costs R64.90, a 42% discount to the UK price.

SteersSA_July2013

We shouldn’t read too much into this, it’s more for interest than anything else. But it may be an indication that the rand has gotten a little undervalued following the recent bout of weakness. It may also indicate that SA prices are set to ratchet sharply higher from here. Or that we will experience a combination of rand strength and accelerating inflation in coming quarters.

PS. Also note the price of an Original King Steer burger is up 7.5% from a year ago.

Mass Social Unrest Hits Egypt

Back in October 2012, ETM research found the countries most at risk of mass, nationwide social unrest were:

Based on monetary inflation trends over the last two years, those countries most at risk of social upheaval in the coming months are Turkey, Brazil, South Africa, Argentina and India.

Then Turkey boiled over.

Then Brazil.

South Africa has been on and off for some time, but is likely to still get worse.

On June 22, Ciaran Ryan wrote, again citing ETM research, that:

Egypt and Argentina are at extreme risk of spreading unrest. “In Egypt, poverty and food insecurity have reached staggering levels in the last few years, an issue that could lead to further social unrest and political instability in the Arab world’s most populous country,” according to the Wall Street Journal.

About 15% of Egypt’s population moved below the poverty line between 2009 and 2011, according to a recent joint report by the United Nations World Food Program. The report also found that an estimated 13.7 million people, or 17% of the country’s 82 million population, suffered from food insecurity there, compared to 14% in 2009.

Couple those underlying economic realities, devalue the Egyptian pound by 15% since the start of the year, which drives the basic cost of living sharply higher, and you have a social unrest cocktail.

Not even a month thereafter, Egypt is exploding with reports that millions of people are flooding the streets to protest the rule of Islamist president.

India is another high risk mass unrest country on our radar, and Argentina is also up there.

Wenzel On Bob Murphy’s Gloating, And My Two Cents

Just for the record, I agree almost completely with Bob Wenzel’s post, where he takes Bob Murphy to task for gloating to his ‘foes’ about the fact that US Treasury yields rose following Ben Bernanke’s statement that he might taper QE.

Bob Murphy is beating his chest because Paul Krugman and Scott Sumner have for a while been saying that the Fed does not impact long-term interest rates. Bob Murphy disagreed and said the Fed does impact long-term interest rates. After the Fed said it will stop buying Treasury bonds last week, the market has taken these long-term yields to the highest level they’ve been in a while, to which Murphy is saying to Krugman and Sumner, “see I told you so.”

Wenzel writes regarding the problem with what Murphy is doing:

As Mises, Hayek and Rothbard taught, the science of economics is a deductive science, not an empirical science. Let’s consider this possible scenario.What happens if Bernanke retracts his statement in the next few days, as he well might do through leaks to favored journalists, and interest rates continue to climb? This could happen.

Would it not be fair for Krugman and Summers to then argue that Murphy doesn’t know what the hell he is talking about, since he argued that Bernanke’s statement caused the run-up in interest rates but now that  Bernanke is hinting that there will not be any “tapering” soon and interest rates are still climbing that Murphy must have the causal factor wrong?

It is also important to note (as Wenzel kind of does) that US Treasury yields were already in a strong uptrend ahead of the Bernanke speech, suggesting something else was already driving the move (or leaked info from the Fed, but I don’t think so, seeing as the market started the move a month and a half before the statement).

Also, to add another scenario to Wenzel’s, I can foresee a situation where the Fed keeps its ‘taper’ talk going, i.e. continues to commit to scaling back QE, but that US Treasury yields start to decline despite that, as growth slows and the stock market corrects, triggering a rotation out of other assets (equities, commodities, junk bonds, EM assets, etc) into the perceived safety of US Treasuries. An economic crisis in Europe, Japan, or China could also trigger a decline of US Treasury yields, despite Bernanke maintaining the ‘taper’ stance. A combination of the two could possibly drive US Treasury yields back to levels where they were a year ago.

Then Sumner and Krugman could also say “see, the Austrians have the causal factor completely wrong!”

Readers who read this post on clb last week, and followed the link to the client report ETM published in March 2013, will note I clearly state I anticipate a rise of US long-term rates in coming months, but that I didn’t mention what the Fed would be doing in coming months as part of this analysis.

In my opinion, the fundamentals moving US Treasury markets today are due to Fed interventions and monetary distortions from months ago. The line of least resistance was already established, and because the market was already bearish, the bearish news out of the FOMC was exaggerated (and bullish news ignored).

Exclusive Interview With The Daily Bell

I did an exclusive interview with The Daily Bell last week that was published yesterday.

 

Chris Becker’s Austrian Perspective on South Africa, Gold and the Ludwig von Mises Institute

Sunday, June 23, 2013 – With Anthony Wile

Here’s a snippet.

Daily Bell: We previously interviewed South African analyst Leon Louw on South Africa, who runs the Free Market Foundation in South Africa, and we’ll ask you some of the same questions we asked him. He was remarkably positive about South Africa and its future, especially if it adopts free-market reforms. Are you similarly positive?

Chris Becker: I would be if the South African government was indeed adopting free-market reforms. But it isn’t. This government continues to introduce policies and legislation that restricts personal choice and liberty, inching the country more toward socialism than away from it. The minister of trade and industry, Rob Davies, is a sitting member of the South Africa Communist Party, while the minister of finance, Pravin Gordhan, used to be a member of the SACP. Other key ministries are littered with Communist Party members or sympathizers. The pervasive state ethos is socialist with ‘red ideals’ clearly pushing the country in that direction, which leaves me less optimistic than Mr Louw.

That said, I am positive about the fact that the ANC government is inefficient and disorganized, enabling the private sector to flourish in parallel to public utilities that can’t serve the public’s wants. We’ve seen huge growth in private education, private security and private medical industries in recent years, without which we would have seen rapidly declining living standards of South Africans. In a micro sense this inefficient and disorganized state leaves the space for quite a lot of personal liberty and allows people to get on with things outside of government control. With this strong central planning and regulatory ethos, if the government could actually follow through with its grand plans, South Africa would be a very unfree place. I call it ‘dangerous efficiency.’

…..

We talk more about South Africa and whether we are headed toward a Zimbabwe style collapse, the long-term Africa play, a gold standard for Africa, and about the Ludwig von Mises Institute SA, among many other things.

Read the full interview here.