Producer inflation falls to lowest level in four-and-a-half years

Producer price inflation slowed in October to levels not seen since April 2015. The 3% year-on-year figure was down from 4.1% in September, according to information from Stats SA released on Thursday.

October’s slowdown is also the sixth consecutive fall since April’s peak of 6.5%, and was marginally below market expectations, with economists surveyed by Bloomberg expecting a reading of 3.1%

Producer inflation — as measured by the producer price index (PPI) — records the change in prices of locally produced commodities. On a month-on-month basis, producer price inflation grew 0.3%. 

The “notable moderation” was driven mainly by further price relief from the coke, petroleum, chemical, rubber and plastic products category, which moved into contractionary territory, Investec Bank economist Lara Hodes said in a note.

The category makes up more than 20% of the PPI basket, and fell 0.4% year on year.

The downside pressures in the petroleum category are mainly thanks to fuel prices coming down from 2018 highs, she said, with October 2018 a particularly high base, when petrol prices rose R1/litre and diesel rose R1.24/litre during that month.

On an annual basis, petrol and diesel price contributions to PPI were down 6.5% and 5.7%, respectively, according to Stats SA.

Falling manufactured food prices, which make up 26.89% of the basket also contributed to the slower headline number, said Hodes, softening to 4.3% year on year from 4.6% in September.

October’s PPI reading also comes as consumer price inflation, released last week, sank to 3.7%, a level not seen since February 2011. At the same time consumer and business confidence remains at low levels, providing little demand in an economy not expected to grow more than 0.5% this year.

Despite weak growth, poor confidence and the easing inflation environment, the SA Reserve Bank did not reduce interest rates at its monetary policy committee meeting last week.

Bank officials said there was not enough evidence to suggest that the slowdown in inflation would be sustained.

In addition, worry about the effects of a possible credit-ratings downgrade by ratings agency Moody’s Investors Service, was seen by some economists as a factor in its decision to hold rates steady.

Moody’s is the last ratings agency to hold SA government debt at investment grade. A downgrade to subinvestment grade — or junk status — could lead to capital outflows, a weaker rand and higher borrowing costs for the government.

The low levels of producer inflation are, however, not expected to last according to Jacques Nel, an analyst at NKC African Economics. The favourable base effects are likely to dissipate and an upward trend in PPI could begin from December, he said.

donnellyl@businesslive.co.za