Struggling rand means producer inflation could well spike

While producer inflation moderated in September with the petrol price reprieve, analysts warn that inflation could accelerate as a result of the weaker rand, risks to food inflation and further fuel price increases.

Factory and farm gate inflation, as measured by the annual change in the producer price index (PPI), eased slightly in September to 6.2% from 6.3% the month prior, data from Statistics SA showed on Thursday.

This is after energy minister Jeff Radebe approved an urgent temporary fuel-price intervention measure that kept the petrol price increase capped at 5c a litre in September, lifting some of the fuel price burden for the month.

However, upward pricing pressures were evident in various categories of the producer basket, which are probably reflective of some pass-through of recent rand depreciation to the production costs of factories and manufacturers, NKC African Economics economist Elize Kruger said.

“Producer inflation is likely to remain elevated over the coming months, mainly driven by a weaker rand,” said Nedbank economist Johannes Khosa.

Notably, manufactured food price inflation, which has provided a significant reprieve to the PPI basket over the past year, edged up to its highest level in a year in September to 1.3% year on year, from 0.5% in August, following six months of deflation.

The food products, beverages and tobacco products category is the biggest in the producer inflation basket and accounts for 34.8% of PPI.

“Prospects of a weak El Niño later in summer is a key upside risk to food inflation,” according to Agbiz economist Wandile Sihlobo.

The weather phenomenon knocked SA hard in 2015 and 2016, driving food prices up as drought ravaged the country.

The record fuel-price increase earlier in October is also expected to drive producer inflation further up while data from the central energy fund suggests there will be another steep increase in November.

The upward trend in PPI could spill over to consumer prices in time, driving CPI closer to the Reserve Bank’s 6% upper target level, warned Kruger.

Producer inflation has traditionally been seen as giving an indication of the consumer inflation figure three months later. The annual change in the consumer price index (CPI) is the key measure of inflation used by the Reserve Bank to set interest rates.

But given the speed of modern logistics, producer inflation increasingly moves in tandem with consumer inflation.

The Reserve Bank has said the upward trend in both consumer and producer price inflation cycles in recent months is “concerning”.

“Interest rates could be hiked by 25 basis points in the next six months, should the rand exchange rate remain at weaker levels and if there is convincing evidence of second-round effects on pricing,” said Kruger.

The monetary policy committee, at its recent meeting, kept the interest rate unchanged and is expected to keep this stance at the final meeting for the year at the end of November.

menons@businesslive.co.za