New data delivers some ‘comforting’ news for South Africa
South Africa’s latest producer price inflation (PPI) figures for March 2023 show a quicker deceleration in producer costs than anticipated, which should ease pressure on wider inflation in the country.
Stats SA published the latest numbers on Wednesday (26 April), showing PPI at 10.6% year on year in March, lower than market expectations of around 11%, and down significantly from 12.2% in February.
“The rapid deceleration in producer inflation is comforting after consumer inflation surprised to the upside for two consecutive months,” said Nedbank economists.
“We expect producer inflation to continue trending lower during the year, with most of the downward pressure stemming from lower commodity prices. Spending in most major economies will be restricted by higher interest rates, which will likely contain both demand for and the prices of commodities.”
Most major categories showed slower annual price increases, coming from a higher base.
The most significant contributors to the annual PPI were ‘coke, petroleum, chemicals, rubber and plastic products’, which added 3.3 percentage points (ppts); ‘food products, beverages and tobacco products’ (2.1 ppts); ‘metals, machinery, equipment and computing equipment’ (1.4 ppts); ‘transport equipment’ (1.3 ppts) and ‘paper and printed product’ (1.2 ppts).
“Even so, the annual increase in all those categories, except for ‘transport equipment’, decelerated,” Nedbank said.
PPI for intermediate manufactured goods was unchanged at 5%, as the acceleration in prices of chemicals, rubber and plastic products, was offset by the sharp slowdowns in the prices of ‘textiles and leather goods’ and ‘sawmilling and wood’ products.
PPI for electricity and water retreated to 10.1% after jumping to an eight-month high of 11.2% in February (from 9.8% in January). The moderation was led by a reduction in electricity prices (10.8% from 11.9%), while water prices were steady for the ninth month at 7.2%.
PPI for mining fell further to 17.1% from 19.5% due to a sharp reduction in ‘non-ferrous metal ores’ prices and softer ‘gold and other metal ores’ and ‘coal and gas’ prices, which outweighed further acceleration in the prices of ‘stone quarrying, clay and diamonds’ prices.
PPI for agriculture, forestry and fishing dropped sharply to 7.5% from 14.2%, mainly due to a decline in prices of ‘cereals and other crops’, which plummeted by 0.4% yoy from a 16.9% rise. ‘Live animal’ prices also added to the downside, falling to 4.6% from 15.4%. Prices of ‘crops and horticulture’, ‘other animal products’ as well as ‘milk and eggs’ also decelerated.
However, despite the more comforting print, Nedbank warned that rand weakness and stubbornly high food prices – the largest category in PPI – still pose big risks to the inflation outlook.
“Food prices are expected to ease on lower global prices and as this year’s good rains support local crop harvests. However, there is a risk that headline inflation could recede at a slower-than-anticipated pace,” the finance group said.
It said that the benefits of lower global prices will partly be mitigated by the rand, which could be pressured by weak global sentiment, political noise ahead of next year’s elections, and concerns about local power shortages, among other factors.
“Meanwhile, local input costs will rise further as companies are forced to use diesel generators to produce electricity as load-shedding continues. Added to these, the price of Brent crude oil could rise from the current levels after the OPEC+ cartel announced further production cuts from May,” it warned.
With inflation likely to recede slowly, the MPC is expected to remain hawkish, raising interest rates one more time by 25 bps in May, taking the repo rate and prime lending rate to peaks of 8% and 11.50%, respectively, Nedbank said.
“We expect the easing cycle to begin in early 2024.”
Read: Nasty inflation shock for South Africa as food prices kick higher
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