Picture: THINKSTOCK
Picture: THINKSTOCK

Producer inflation moderated to its lowest level in five months in July, due to lower fuel prices.

Farm and factory-gate inflation, as measured by the annual change in the producer price index (PPI), slowed to 4.9% year on year in July from June’s 5.8%, Statistics SA said on Thursday.

This is the lowest level since February and less than the 5.6% expected  by economists polled by Bloomberg.

Food products, beverages and tobacco products increased by 5.1% and contributed 1.7 percentage points while coke, petroleum, chemical, rubber and plastic products increased by 4% and contributed 0.9 of a percentage point.

The fuel price component has consistently been the largest contributor to the headline PPI reading. In July, petrol prices dropped substantially by 95c/l due to a large drop in international oil prices. This was the first fuel price cut in six months.

Annual producer price inflation (final manufacturing) was 4,9% in July 2019, down from 5,8% in June 2019. The producer price index decreased by 0,2% month-on-month in July 2019. Source: Stats SA: PPI , July 2019. Illustration: RUBY-GAY MARTIN
Annual producer price inflation (final manufacturing) was 4,9% in July 2019, down from 5,8% in June 2019. The producer price index decreased by 0,2% month-on-month in July 2019. Source: Stats SA: PPI , July 2019. Illustration: RUBY-GAY MARTIN

While fuel price increases in August and an expected increase in September will exert upward pressure on prices, the high base of calculation given hefty fuel price increases in the corresponding months of 2018 are likely to support a moderation in PPI in coming months, NKC economist Elize Kruger said.

Producer inflation partially foreshadows consumer inflation, which is the key benchmark used by the SA 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.

Stats SA’s PPI report on Thursday came a week after it reported that consumer inflation, as measured by the annual change in the consumer price index (CPI), slowed to 4% year on year in July, the lowest level since January.

In July, 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.

Despite consumer and producer inflation surprising to the downside, the Bank is likely to adopt a wait-and-see approach and leave rates on hold for the remainder of the year given the uncertain trajectory of the rand, Nedbank economist Busisiwe Radebe said.

menons@businesslive.co.za