Producer prices quickened to a record high in May further posing severe inflation risks to SA’s already fragile economy.
Factory prices continue to be under severe pressure, with global upside risks likely to persist into the second half of 2022.
SA’s producer price index (PPI), which measures changes in the prices of goods bought and sold by manufacturers, climbed 14.7% in March, marking the sixth straight month of double-digit producer inflation and the highest reading since the series began in 2013.
The most significant contributors to the annual increase remained the coke, petroleum, chemicals, rubber and plastic products category as well as the food products, beverages, and tobacco products category. These grew by a huge 31.7% and 9.7% respectively, adding 7.7 and 2.6 percentage points to the headline PPI.
The metals, machinery, equipment and computing equipment category was also another a key driver to headline PPI, adding 2.3 percentage points to the total.
On a monthly basis, growth in producer prices remained steady at 1.8% in May. The main driver of the monthly increase was the coke, petroleum, chemical, rubber and plastic products category, which added 0.8 percentage points.
PPI data is a key indicator of inflation rates that consumers might face in the future because firms generally pass higher input costs on to customers.
Last week, markets priced in a higher rate hike at the next monetary policy committee meeting — at 50 basis points — after May’s consumer price index accelerated to 6.5% and exceeding market expectations of 6.2%. This makes it the highest reading since January 2017.
Oxford Economics, FNB and Nedbank warned that the country’s consumer price inflation looked set to breach 7% in June. PwC said it expected the number to climb in June and July.
Portfolio manager at Allan Gray, Thalia Petousis, said the forward rate market revised the probability of local rate hikes higher, “with the repo rate estimated at close to 7.5% within a year, translating to increases of 50 basis points at almost every monetary policy committee meeting”.
The rand — which has been under pressure since the US Federal Reserve took a more aggressive stance towards its monetary policy tightening — was pushed weaker in June following the Fed’s 75 basis point hike. Analysts say the domestic currency will continue to be vulnerable to further weakness should the Fed maintain its aggressive policy stance.
“Given the persistence of global price pressures and the uncertain outlook for the rand, we expect prices at the factory gate [factory prices] to remain elevated for some time,” Nedbank economist Tachin Ramnath said.
Ramnath added that producers would have to contend with a range of domestic factors such as the recent protests, which blocked some of the major national transportation routes, rising utilities, and frequent power outages — “all of which will add further upward pressure on the cost of production,” Ramnath said.
Even though there has been some reduction in global food and industrial metal prices, prices still remain high by historical standards because of supply shortages and clogged-up supply chains.
FNB economists said the double-digit producer inflation still reflected elevated supply chain pressures, with manufacturing surveys noting concern about raw material shortages.
“This, together with the subdued domestic demand recovery and concerns of sharp global growth moderation, does not bode well for manufacturing activity,” said FNB.
Update: June 30 2022.
This story has been updated with additional information.
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