BusinessSASA Business

South Africa’s factory gate inflation set for another rise

Producer price inflation (PPI) — a measure of the costs absorbed by manufacturers — is expected to hit another record high as war-related supply pressures continue to take their toll.

Forecasters are expecting producer inflation to soar to 14% year-on-year in May, up from 13.1% the month prior. The previous print marked the highest level of producer inflation since 2012. Inflation has ticked up as Russia’s war on Ukraine has choked global energy supplies, sending prices soaring.

If producer inflation hits the consensus forecast of 14%, it would have accelerated to more than double consumer inflation. 

Data released by Statistics South Africa last week showed that consumer prices rose to 6.5% in May, well above the consensus expectation of 6.1%. 

Analysts who spoke to Mail & Guardian last week said consumer prices are expected to rise above 7% in the coming months as food and petrol prices continue to increase. 

Consumer inflation was largely driven by food prices in May. Oil and grain prices soared month-on-month, up 10.1% and 3.4% respectively, signalling the pass-through of higher production costs.

Elevated food prices will probably be at the heart of the rise in producer inflation, according to Investec economist Lara Hodes. Investec expects producer inflation to hit 13.9% for May.

In a note last week, Hodes said: “While a moderation in inflation within the coke, petroleum, chemical, rubber and plastic products grouping, in which fuel price dynamics are captured is likely, food price inflation is expected to remain elevated, and owing to its relatively large size in the PPI basket, continue to weigh on the headline outcome.”

Farmers are also dealing with heightened key input costs including fertiliser, agro-chemicals and fuel, further weighing on prices, Hodes added. The Food and Agriculture Organisation of the United Nations Grain Price Index was up 29.7% year-on-year in May.

Even at a decade-long high, South Africa’s producer inflation pales in comparison to Germany’s. Data released last week showed that the PPI of Europe’s biggest economy increased 33.6% year-on-year in May.

Also this week, the consumer confidence index — compiled by FNB and the Bureau for Economic Research — will provide an indication of the willingness of South Africans to continue spending during the current inflation crunch. 

The index declined from -9 to -13 points during the first quarter of 2022. The decline was attributed to a bleaker economic outlook and strained household finances.

Hodes said the index is expected to remain unchanged during the second quarter. “Concerns over the economic outlook and households’ financial position remain elevated. An expected higher interest rate and cost environment is clearly suppressing sentiment. Specifically, as the Reserve Bank continues to normalise the repo rate, higher interest rates will impact spend of the indebted.”

Related Articles

Back to top button