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Factory gate inflation surprises on the upside

Producer inflation accelerated to 14.7% year-on-year in May, the highest rate since 2012.

Headline producer inflation — a measure of the costs absorbed by manufacturers at the factory gate — rose again after hitting 13.1% the month prior, according to data from Statistics South Africa on Wednesday.

The main contributors were coke, petroleum, chemical, rubber and plastic products, which increased by 31.7% year-on-year and contributed 7.7 percentage points to the headline number. 

Food products, beverages and tobacco products were the second-biggest driver, increasing by 9.7% year-on-year and contributing 2.6 percentage points. The price of food oils and fats saw the highest year-on-year increase, climbing 61.3% compared with last May. 

Like consumer inflation, which shot above the upper limit of the South African Reserve Bank’s target band to 6.5% in May, producer inflation surprised on the upside. Consensus expectations had put producer inflation at 14% in May,

At the heart of the climb in producer inflation was elevated food costs, which also caused consumer inflation to soar above the top limit of the Reserve Bank’s 3-6% target. Analysts who spoke to the Mail & Guardian last week said they expect consumer prices to reach above 7% in coming prints, especially as petrol prices continue their ascent. 

May’s producer inflation, which gives an indication of further costs that will be passed on to consumers, is yet another sign of just how strained household finances have become in  recent months. Higher-than-expected inflation will probably prompt the Reserve Bank to hike the repo rate, which affects the cost of debt, by another 50 basis points, putting further pressure on people’s disposable incomes.

Other data released this week showed that consumers are feeling the pinch. An index compiled by FNB and the Bureau for Economic Research showed that consumer confidence slumped to its worst reading — bar the second quarter of 2020 — in more than three decades. 

Consumer confidence fell notably across all income groups. The data shows that high-income confidence has soured more than low-income confidence since the end

of 2021.

Having already slumped from -11 to -18 index points in the first quarter, the confidence of high-income households (earning more than R20 000 a month) crashed to -30 in the second quarter — only three index points north of the historic low of -33 recorded in the second quarter of 2020.

Investec chief economist Annabel Bishop pointed out that affluent households account for more than two-thirds of South Africa’s household consumption expenditure, which itself accounts for two-thirds of GDP.

She said substantially high inflation and interest rates cannot be ignored and will have a suppressing effect on real growth this year and increasingly in 2023 and 2024 on lagged effects of higher interest rates. 

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