Producer inflation has slowed to the upper end of the Reserve Bank target of 6%  for the first time in three months, thanks to slower fuel prices .

Producer inflation partially foreshadows consumer inflation, which is the key benchmark used by the Reserve Bank’s monetary policy committee (MPC) in setting interest rates. However, the relationship is not perfect, as producers often seek to absorb price pressures to retain market share.

While the fuel price increased for four consecutive months this year, the increases were lower than those seen in the same period last year. The high base from 2018 has helped contain producer inflation. If current conditions hold and inflation remains contained, there is the possibility of another rate cut at the September meeting, Nedbank economist Busisiwe Radebe said.

Farm and factory gate inflation, as measured by the annual change in the producer price index (PPI), moderated to 5.8% year-on-year in June from May’s 6.4%, Statistics SA said on Thursday.

This was in line with the expectations of economists polled by Bloomberg. Before June, PPI had been above 6% year-on-year since March.

Coke, petroleum and chemicals added 1.9 percentage points to the headline figure, although rising food costs also played their part, adding 1.6 percentage points.

The fuel price component has consistently been the largest contributor to the headline PPI reading. The index came off a high base last year when SA saw record fuel price increases – June 2018 saw a petrol increase of 82 c/l.

Although it was a small increase, motorists and businesses saw a fifth consecutive fuel-price hike in June, when unleaded petrol rose 9c/l. However, with a decrease of 95c/in July, producer inflation is likely to moderate further.

Lower fuel prices compared to the same period will likely support a moderation in producer inflation in the coming months, while a weak domestic demand environment continues to constrain the pricing power of producers,” NKC economist Elize Kruger said.

While producer inflation is expected to remain contained for the rest of the year, it could accelerate with the surge in administered prices, especially electricity, and rising domestic food prices, Investec economist Lara Hodes said.

Stats SA’s PPI report on Thursday came a day after it reported that consumer inflation, as measured by the annual change in the consumer price index (CPI), remained at 4.5% year-on-year in June.

Last week, the MPC cut interest rates for the first time since March 2018 on lower economic growth — following a steep contraction in the first quarter — and subdued inflation.