A surge in producer prices by the most since at least 2013 has heightened the inflation risks facing SA’s economy, whose already fragile recovery may now face an increased pace of interest rate hikes.
SA’s producer price index (PPI), which measures changes in the prices of goods bought and sold by manufacturers, climbed 11.9% in March, the most since the series began in 2013, Stats SA data showed on Thursday. That reading was a huge percentage point more than the 10.7% consensus of economists surveyed by Bloomberg.
The rising price pressure on SA’s producers is consistent with what is being observed elsewhere in the world, with most of it coming from energy and food, a situation that has been made worse by Russia’s invasion of Ukraine.
Prices rose 2.5% from the month before, more than twice the 1.1% rate in February.
The data is the key indicator of inflation rates that consumers might face in the future because firms generally pass higher input costs on to customers, though sometimes a lack of demand may limit their ability to do so.
Consumer inflation is already in touching distance of the upper end of the Reserve Bank’s 3%-6% target range, which policymakers have said they expect to be breached during 2022, before returning towards the midpoint in 2023.
Local bonds dropped, with the 10-year yield, which moves inversely to prices, rising above 10% for the first time since March. Higher inflation and steeper interest rates are bad for bonds because they reduce the relative attractiveness of the fixed coupons on offer.
Nedbank senior strategy analyst Walter de Wet said money markets are pricing in a 50 basis point (bps) increase in the repo rate in May.
The rand — which has been under pressure as prospects of the US Federal Reserve tightening faster than its counterparts have boosted the dollar — fell for the ninth consecutive day. It traded above R16/$ for the first time since early January.
The rand has trended weaker as the Russia-Ukraine conflict and Covid-19 lockdowns in China heighten concerns of a global economic slowdown, boosting demand for US assets as safe havens.
SA’s March postings are comparable to countries such as the US and China, which have recorded annual PPI at 11.2% and 8.3%, respectively. Germany, Europe’s largest economy, in March recorded producer price increases that were the fastest in more than seven decades.
The Bank’s monetary policy committee (MPC), which raised the repo rate by 25 bps in each of its past three meetings, will see the PPI reading as confirmation that it needs to normalise policy further, De Wet said. It will “also serve to confirm the forward rate agreements market view that is pricing in a 50 bps hike in the repo rate in May”.
Higher rates will heap more misery on an economy that is struggling with an unemployment rate of more than 35%. Based on IMF forecasts released in April, it will lag behind global economic growth over the next two years. The Washington-based lender expects SA’s GDP to expand 1.9% and 1.4% in 2022 and 2023, respectively.
It warned that the global economy may face a prolonged period of slow growth and high inflation, posing a policy dilemma for central banks, which risk engineering recessions if they move too fast on rates.
They may also be criticised if they allow faster inflation to become entrenched, necessitating even more aggressive policy tightening later.
Investec economist Lara Hodes said food price inflation is expected to remain elevated and this will exert upward pressure on the headline outcome.
“Supply concerns have been worsened by the geopolitical situation, leading to an increase in prices of a number of agricultural commodities and main inputs like fertiliser,” she said.
In its last meeting, the MPC said risks to the inflation forecasts are firmly on the upside. Its model released at the March policy meeting suggested that hikes would be gradual, with the repo rate reaching 6.1% in 2023 and 6.68% in 2024. The repo rate is currently at 4.25%.
But news from further afield showed how quickly the situation can change, with Sweden’s Riksbank raising its key interest rate by 25 bps to 0.25% on Thursday and flagging more increases ahead, despite having said in February it would not act until 2024.
Update: April 28 2022
This story has been updated throughout.
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