Nedbank warns about petrol prices after another inflation surprise for South Africa
South Africa’s Producer Price Inflation has come in at 4.2% in July, lower than the expected 4.5% and down from 4.6% in June.
This is the second inflation indicator this month that has surprised markets by coming in lower than projections. However, economists warn that risks around petrol prices could see worse outcomes ahead.
According to economists at Nedbank, disinflation occurred across most major producer categories, but the main drag came from slower price growth in ‘food products, beverages and tobacco products’, ‘coke, petroleum, chemicals, rubber, and plastic products’ and ‘metals, machinery, equipment and computing equipment’.
Inflation for food, beverages and tobacco products decelerated to 3.5% in July from 4% in June.
“Outcomes were mixed within this basket. The downward pressure emanated from ‘fruit and vegetables’ and ‘other food products’,” Nedbank noted.
Fruit and vegetable prices rose by a slower 9.3% yoy from 10.9% in June, while ‘other food products’ eased to 4.5% from 5.6%.
Within the latter category, sugar (-7%) contributed the most to the decline. The decline in ‘oils and fats’ also deepened to 12.5% from 11.1%, while prices of meat and dairy products moderated further.
However, grain mill products, starches and starch products and animal feeds rose by 1% yoy, following eight months of contraction.
“The increase partly reflected the fading impact of last year’s high base, but probably also the impact of the drier weather conditions experienced earlier in the year,” the bank said.
The disinflation in coke, petroleum, chemicals, rubber, and plastic products continued, with prices in this category moderating to 5% from 6.7%, mainly due to lower fuel prices.
Petrol price inflation decelerated sharply to 1.6% from 5.8%, and that of diesel eased to 5.6% from 7.9%.
“These declines were facilitated by a steady rand and some moderation in global oil prices. Prices of chemical products, as well as rubber and plastic products, also slowed,” it said.
Prices of metals, machinery and equipment, including computers, decelerated to 4.9% yoy from 5.7% due to lower prices of general and special purpose machinery, which outweighed higher prices of ‘household appliances and office machinery’ and ‘structural and fabricated metal products’.
PPI for intermediate manufactured goods accelerated to 4.2%, the highest since May 2023, mainly due to higher prices of basic precious and non-ferrous metals, basic and fabricated metals, and rubber products.
However, textiles and leather goods prices slowed sharply to only 0.9% from 6.4% on base considerations.
PPI for electricity and water rose to 10.2% from 9.2% due to higher electricity prices after Eskom’s 12.7% price hike for 2024/25 came into effect in July.
However, water tariffs increased at a slower rate of 5.6% from 8.7%.
According to Nedbank producer inflation will likely remain contained in coming months.
“The impact of drier weather conditions in February and March will still gradually filter through to food prices. This, along with the normalisation in the statistical base, will cause food inflation to start edging higher,” it said.
However, the upward pressure will partly be mitigated by lower global inflation and the higher rainfall expected in the coming season.
Fuel prices remain a significant concern to the outlook, however.
“While relatively subdued global demand and ample supply will keep oil prices in check over the short term, ongoing geopolitical tension, particularly the Israel–Hamas, and the Russian-Ukraine conflicts, still pose upside risks.
“If the rand could maintain its resilience against the US dollar, it would help to mitigate the risks,” Nedbank said.
The rand is expected to benefit from reduced local political risks and improvement in global risk appetites as the US starts to cut interest rates.
However, any relapse in global growth or signs of a hard landing in the US could also trigger another bout of risk-off sentiment.
“Other operational costs, including those relating to electricity supply and logistics, could also fare up against, driving up production costs and thereby feeding through into producer prices,” it said.
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