VAT-free Food Products
South Africa is in an economic crisis. Three million people are reported to have lost their jobs in the first month of the national lockdown alone, and many businesses are still unable to open under the current lockdown restrictions. Electricity prices are set to rise, as Eskom’s debt burden continues to soar. And to make matters worse, there have been reports that food prices are climbing too.
How much have food prices increased over the past few months? We wanted to find out, so, we built a food price index for VAT-free products. We used the Consumer Price Index (CPI) weights from Stats SA to inform the way we weighted products. We’d like to share this index with you.
Why did we choose to focus on VAT-free products? Well, firstly, building a food price index for all food types is an enormous undertaking! We wanted to start with something manageable. More importantly though, foods that are VAT-free are considered to be essential components of a basic diet.
There are 19 VAT-free food types in South Africa:
- brown bread
- maize meal
- mealie rice
- dried mealies
- dried beans
- pilchards/sardinella in tins
- milk powder
- dairy powder blend
- vegetable oil
- cultured milk
- brown wheaten meal
- edible legumes and pulses of leguminous plants
Within each category, there are numerous sub-categories. For example, there are many different types of vegetables.
We grouped the VAT-free product categories into five main components. We then weighted the products represented by each component according to Stats SA guidelines, and we also gave each retailer an equal weighting. Here’s the resulting components plot!
The prices of dairy products, oils and grains have increased steadily over the past few months - a trend also reported by the Agricultural Business Chamber.
The consolidated index shows a steady rise in the price of VAT-free products.
A 2.5% rise (Note: This value is based on the index at 3 September 2020. The above data have been subsequently updated.) in the cost of VAT-free items may not seem like much, but it’s important to note that this increase has been recorded over a period of just five months. As a reference point, the most recent annual food price inflation rate published by Stats SA was 4.3%, in July. If the current trend continues, the annual rate could be a lot higher in the coming months.
However, there is some hope. South Africa is expected to have a bumper maize harvest this year, and local citrus harvests are also set to be higher than last year. Additionally, the global rice harvest is expected to be the largest on record (South Africa imports most of its rice). Will these good harvests bring down food price inflation? We’ll be watching closely.