Producer inflation accelerates on fuel price hikes

The steepest fuel price increase in four years in April drove input costs to their highest level since November 2018.

Farm and factory gate inflation, as measured by the annual change in the producer price index (PPI), accelerated to 6.5% in April from March’s 6.2%.

This was at odds with expectations. The consensus among economists, according to a poll by Bloomberg, was that producer inflation would ease to 5.9% year-on-year.

Coke, petroleum and chemicals added 2.5 percentage points, while the food segment of the index added 1.5 percentage points. Metals, machinery, equipment and computing equipment contributed 0.9 of a percentage point.

Motorists got a third consecutive fuel price increase in April, while a hike in government levies also took effect at the beginning of the month. Petrol was up 12.6% compared with 2018 and 9.9% compared with March 2019. Diesel rose 15.9% from a year ago and 5.8% from March.

While there could be a very marginal petrol price drop in June, which is expected to be announced on Friday, May saw a fourth consecutive increase that could drive producer inflation up that month. Diesel is expected to continue to rise.

The Automobile Association (AA) said earlier this week that any number of issues could impact the fuel price in the second half of the year, and advised against relying on fuel price stability in the short to medium term.  “We suspect there may be more economic storms ahead,” it said.

NKC economist Elize Kruger said: “A high base of calculation at play in the next three months, given hefty fuel price increases in the corresponding months of 2018, should support a moderation in the PPI rates in coming months, while a weak domestic demand environment continues to constrain the pricing power of producers.” 

However, Investec economist Lara Hodes warned that producers could continue to come under pressure in the coming months.  “Surging administered prices, especially electricity, a key input for manufacturers, remains a key concern. This, coupled with rising domestic food prices, a highly volatile international oil price and global growth trepidation, continue to weigh on the inflation outcome.” 

Nedbank economist Busisiwe Radebe said the risks to the producer inflation trajectory are mainly tilted to the downside.

Softer fuel prices, and strong grain production should also contain prices in the short term. Upward pressure will likely stem from electricity prices, which come into effect in July as well as any rand weakness, Radebe said.

Stats SA’s PPI report on Thursday came a week after it reported inflation, as measured by the annual change in the consumer price index (CPI), slowed slightly to 4.4% in April from 4.5% in March.

Producer inflation was historically viewed as foreshadowing consumer inflation, which is the key benchmark used by the Reserve Bank’s monetary policy committee to set interest rates. But with modern logistics, producer inflation tends to move in tandem with consumer inflation, but swings more wildly because retailers try to keep prices “sticky” to avoid upsetting customers.

Last week, the monetary policy committee kept the repo rate unchanged but indicated it may cut interest rates by the end of the first quarter of 2020 due to SA’s faltering economic growth and relatively contained inflation.

menons@businesslive.co.za