Economists are expecting another surge in producer inflation this week and warn that it could keep climbing over the remainder of the year, driven by higher energy costs and the global shortage of raw materials.
Producer inflation for October will be published on Thursday.
The producer price index (PPI) jumped to 7.8% year on year in September from 7.2% year on year in August mainly due to increases in the price of petroleum-related products.
Oil prices have increased by about 68% over the year to date compared with 2020’s average price. But even excluding fuel and related prices, which account for almost 20% of the PPI basket, producer inflation measured 6.6% year on year in September, up from 6.1% year on year in August.
In recent months, ongoing global supply shortages and strong demand have caused a wide range of prices to accelerate, including raw materials, intermediate inputs, and food. This has caused global factory-gate and food price inflation to surprise repeatedly on the upside.
FNB chief economist Mamello Matikinca-Ngwenya said that producer inflation could spike above 8% before year’s end on higher fuel and input costs, before moderating in 2022.
BNP Paribas economist Jeff Schultz also anticipates another sharp rise in factory-gate prices into the year-end, warning that transport costs are likely to continue to hit record highs on a weaker rand and high oil prices.
Considerably higher
He expects headline PPI inflation to have remained sticky at 7.8% year on year in October due largely to elevated fuel and manufactured food prices given the persistence of supply-chain bottlenecks.
Over the year-to-date, producer inflation has averaged 6.3%, considerably higher than the 2.4% and 5.2% recorded over the first nine months of 2020 and 2019 respectively.
Investec economist Lara Hodes also expects producer inflation to have remained flat at an elevated 7.8% year on year in October.
In addition to the upward pressure of rising food and fuel prices, she notes that persistent supply-chain constraints could drive intermediate manufactured goods inflation even higher than the 19.5% year on year growth rate recorded in September.
The general rise in shipping and other input costs (the price of imported fertiliser and agrochemicals is up more than 30% year on year) is proving “a significant challenge” to domestic agriculture, according to the Agriculture Business Chamber’s chief economist Wandile Sihlobo.
He is beginning to worry that these problems may soon outweigh the benefit of SA’s bumper agriculture harvests and high product prices.
Target band
Last week, the Reserve Bank responded by hiking the repo rate 25 basis points to 3.75% in a split decision. Despite SA’s muted growth outlook, the Bank emphasised the risks to domestic inflation, including the upward trend in global inflation, the impact of rand weakness, as well as higher energy prices, import duties and food costs.
However, even with continued upside risks, the Bank expects domestic inflation to stay close to the midpoint of the target band until 2023, provided inflation expectations remain anchored.
The RMB/BER business confidence index for the fourth quarter will be published on Friday.
After climbing 15 index points to reach 50 in the second quarter, business confidence fell sharply to 43 index points in the third quarter mainly because of the July unrest, something which is likely to have a lasting negative effect on sentiment.
Economists expect renewed load-shedding to place further pressure on confidence in the fourth quarter, especially if accompanied by a fourth wave of Covid-19 infections.
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