South Africa’s producer inflation moderated further to 2.7% year on year (y/y) in July from 4.8% in June, its lowest level since October 2020, mainly on cooling fuel prices, a welcome relief to South Africans that have been confronted with a cost of living crisis.
PPI, which measures changes in the prices of locally produced commodities, was lower than the market’s forecast of 3% y/y.
Statistics South Africa (Stats SA) said on a month-on-month basis, the producer price index (PPI) was at 0.2% in July from -0.3% the previous month.
The coke, petroleum, chemical, rubber and plastic products grouping, which makes up 22.7% of the PPI basket, detracted -2.5% points from the headline reading in July, versus -0.8 of a percentage point in June.
This as petrol price inflation slid by -18.5% y/y, from a contraction of -8.2% previously, while diesel prices fell by -23.3% y/y from -16.2% y/y previously.
Helping moderate PPI was was manufactured food price inflation, which decelerated further in July to 6.8% y/y from 8.0% y/y recorded in June.
Lara Hodes, an economist at Investec, said, “This is the lowest reading recorded since the first quarter of last year.”
She said South Africa had benefited from the deceleration in global food commodity prices, with the Food and Agriculture Organization of the United Nations’ (FAO) food price index -11.8% lower in July 2023, versus July 2022.
“There are, however, “renewed risks in global agriculture”, according to Agbiz. Specifically, the Black Sea Grain Deal challenges and India's rice exports ban remain an upside price risk,“ she said.
Inflation within the paper and printed products category and the transport equipment segment also eased on an annual basis, contributing a combined 1.6% points to the headline reading versus 2.2% points previously.
The main contributor to the headline PPI monthly increase was metals, machinery, equipment and computing equipment, which increased by 1.2% month-on-month.
Stats SA data showed that the annual percentage change in the PPI for intermediate manufactured goods was -0.1% in July 2023 (compared with 2.4% in June 2023).
The index decreased by 2.0% month-on-month.
Nedbank economist Johannes Khosa said, “The lower-than-expected inflation outcomes (both producer and consumer) are encouraging. However, July’s figures are likely the bottom of the current cycle. Inflation will start drifting slightly up in the coming months as the base effect dissipates. However, it will remain relatively subdued, contained by lower fuel costs, falling food prices and generally weaker domestic demand.”
He said the upside risk would emanate from the weaker rand, which was likely to remain volatile amid choppy global risk appetites given the uncertain global growth outlook, higher US interest rates, concerns about the impact of electricity shortages on domestic growth prospects and potentially damaging political rhetoric ahead of next year’s elections.
“At the same time, load shedding will continue to drive up local input costs as companies are forced to use diesel generators or incur the expense of installing alternative electricity sources. The El Niño weather pattern also poses upside risks for agricultural production and food prices. We forecast PPI to end the year at around 5%, averaging 6.7% in 2023, down from 14.3% in 2022,” Khosa said.
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