Big petrol and diesel price win for South Africa

 ·31 Oct 2024

Producer Price Inflation (PPI) moderated from 2.8% in August to just 1% in September, marking the lowest outcome since June 2020 – largely thanks to much lower petrol and diesel prices this year.

The figure came out better than the market forecast of around 1.5%.

According to economists at Nedbank, one key driver of the nice surprise was declining fuel prices, which have seen five consecutive cuts since May.

Disinflation in the PPI is usually a strong indicator of the inflation trend in CPI, which spells good news for consumers.

“The disinflation in coke, petroleum, chemicals, rubber, and plastic products intensified in September, with prices falling sharply by 5% due to a drop in fuel prices,” Nedbank said.

Prices of petrol and diesel plummeted by 13.2% yoy and 15.7%, respectively, due to subdued global oil prices and a firmer rand.

During the month, the price of Brent crude oil fell by 8.9%, while the rand appreciated by 3.3% against the US dollar.

While the latest data from the Central Energy Fund (CEF) points to a petrol and diesel price increase of around 20 cents per litre next week, the year-to-date movement in prices has been a net reduction for motorists of about R2.00 per litre for petrol and over R3.00 per litre for diesel.

This has had a significant impact on broader production costs, particularly diesel, which is used across industries.

The prices of chemical products also moderated further. However, the prices of rubber and plastic products accelerated by 5.6% year over year from 2%.

Inflation for metals, machinery, and equipment, including computers was almost unchanged at 3.4% (from 3.5%), as the slower increase in structural and fabricated metal products was counterbalanced by an acceleration ‘general and special purpose machinery’ and ‘household appliances and office machinery’.

By contrast, inflation for food, beverages, and tobacco products continued to trend higher, accelerating to 3.8% from 3.6% as the base normalised and the impact of drier weather conditions earlier in the year filtered through.

Most of the food categories experienced some upward pressure, with the largest increases recorded in the follow segments:

  • Fruit and vegetables (12.9% from 10.1%);
  • Dairy products (up 3.1% from 1.9%); and
  • Grain mill products, starches and starch products and animal feeds’ (2.4% from 2.1%).

Disinflation in ‘oils and fats’ and ‘sugar’ continued, with prices falling by 10.6% yoy and 6.1%, respectively, but the rate of contraction moderated.

Good news ahead

Nedbank said that it expects producer inflation to remain subdued in the coming months, contained by continued global disinflation, low global oil prices, a relatively steady rand, and more favourable weather conditions.

“However, there are some upside risks. Food inflation will likely edge higher on the lagged impact of the drought earlier this year and fading base effects,” it said.

“The upside here will be partially offset by subdued global food prices and largely favourable climatic conditions.”

The outlook for fuel inflation is encouraging, however, with global oil prices expected to remain subdued on the back of ample supply and muted demand.

However, the bank warned that risks to the forecast are tilted to the upside as the oil price remains vulnerable to tensions in the Middle East.

“The biggest concern is that the conflict between Israel and Iran could escalate into a broader regional war, which could potentially disrupt oil supply channels and result in another surge in the oil price,” it said.

However, the rand will probably remain stable in the short term, supported by positive global risk sentiment as US monetary policy eases further, it said.

Again, this comes with the warning that uncertainty surrounding the outcome of upcoming US elections could weigh on the rand in the near term.

“Although the pressures exerted by limited electricity supply and logistic inefficiencies on domestic cost structures have eased somewhat, they remain elevated and pose an upside risk to producer inflation. We forecast PPI to average 3.3% in 2024, down from 6.9% in 2023.”


Read: Bad news for petrol prices next week

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