Annual producer price inflation fell to its lowest level in more than two years, supported by a further deceleration in manufactured food price inflation and a substantial decrease in both the petrol and diesel price in June.
Stats SA on Thursday showed producer price inflation fell to 4.8% in June, from 7.3% in May and 8.6% in April, reaching its lowest level since February 2021. The June reading is also below Reuters’ consensus of 6%.
Stats SA data shows most major categories moderated further, amplified by the higher base established in 2022. The coke, petroleum, chemicals, rubber and plastic products category remained the main driver of the downward trend, followed by the food products category.
Inflation in the coke, petroleum, chemicals, rubber, and plastic products category contracted 2.9% from an increase of 3.6% in May.
Nedbank economist Crystal Huntley said all subcomponents decreased off last year’s high base when the Russian invasion of Ukraine ushered global oil and grain prices to multiple-decade highs.
The data shows diesel and petrol prices drove the plunge in June, dropping 16.2% and 8.2% year on year from -8.2% and 7% in May, respectively.
Chemicals were down to 8% from 8.5%, while the moderation in rubber and plastic products was less pronounced (1.8% from 1.9%) after receding significantly in previous months.
Food inflation fell from 8.8% year on year in May to 8% in June, with declines across most subcategories. Huntley said the most significant downward pressures came from oils and fats.
Producer inflation for electricity and water moderated to 13.6% from 15.5% as electricity decreased from 15.5% to 13.6% and water remained elevated at 8.1%.
Producer prices have been easing since July 2022 when the producer price index (PPI) accelerated to 18%, reaching its highest level since the series began in 2013.
Food inflation also fell from 8.8% in May to 8% in June.
The PPI measures changes in the prices of goods bought and sold by manufacturers and is considered a key indicator of future consumer inflation. Producers can either absorb high input cost increases or pass them on to consumers.
Investec economist Lara Hodes warned that while food price inflation is projected to ease further, there will be renewed risks in global agriculture.
“India is threatening to ban the exports of rice and the Black Sea Grain Initiative that facilitated grains and oilseeds exports from Ukraine [has been] terminated,” Hodes said.
Load-shedding will continue to drive up local input costs, forcing companies to use diesel generators or incur the expense of installing alternative electricity sources, economists have warned.
Rand volatility has been cited as another risk as weak currency affects import prices.
Huntley said the local unit will remain under pressure as global risk appetite seesaws amid the global economic downturn and investors remaining wary of SA, with the electricity shortage eroding domestic growth prospects and political rhetoric likely hardening ahead of the 2024 elections.
The persisting wariness of investors is due to electricity shortage eroding domestic growth prospects, diplomatic tensions simmering on the looming Brics summit and political rhetoric that is likely to harden ahead of next year’s elections.
“The end of the Ukraine-Russia grain export deal and the emergence of the El Niño weather pattern also pose upside risks to fresh produce prices,” she said.
Update: July 27 2023
This article has been updated with new information
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