Nasty inflation surprise for South Africa

Headline producer price inflation (PPI) rose 0.5% month on month in April, translating to 5.1% year on year and surprising markets to the upside.

This is up from 4.6% year on year in March and higher than market expectations of 4.9%.

According to Stats SA, the upside surprise in inflation was driven by the coke, petroleum, chemical, rubber and plastic products grouping (in which fuel price dynamics are recorded), which contributed 0.2 of a percentage point to the monthly PPI.

Investec economist Lara Hodes noted that this reading followed a petrol price increase of 67c/litre in April.

“When measured on a year-on-year basis, inflation within this category added 1.6% points to the headline reading (1.1% points previously). Consumers should receive some reprieve in June however, supported by a stronger rand and largely contained global oil price,” she said.

The other key driver of inflation—manufactured food price inflation—fell notably to 2.8% y/y from 3.6% y/y logged in March, the lowest reading since January 2019, on still elevated base effects.

“Accordingly, the food products, beverages and tobacco products category, which makes up a substantial 29.16% of the PPI index, added 1.0% points to the annual topline number from 1.3% points previously,” Hodes said.

A breakdown of the food basket indicates that meat and meat products price inflation declined further from 2.7% y/y to 1.7% y/y.

“This reflects an improvement in meat supplies after some constraints at the end of 2023 because of avian influenza,” according to Agbiz.

Moreover, the other food products category (which includes bakery products, sugar and other food) saw prices fall to 5.0% y/y from 6.6% y/y logged in March. Sugar prices fell to 5.7% y/y from 9.5% y/y and 14.8% y/y recorded in March and February respectively.

Inflation is expected to ease in the second half of the year, although the annual average is still anticipated to sit at about 5%, which is higher than the mid-point mark being targetted by the South African Reserve Bank (SARB) as a precursor to start cutting interest rates.

The SARB Monetary Policy Committee will be delivering its latest vote on interest rates later this afternoon (30 May), where economists, analysts and investors expect another hold.

Rate cuts are only seen coming at the tail of 2024, with some projections pushing it out to early 2025.

Read: How much you need to earn to afford a Merc in South Africa: 2014 vs 2024