As was widely expected, consecutive decreases in fuel prices helped producer inflation in July to slow by 0.2% month on month.
Data released by Stats SA on Thursday showed that the coke, petroleum and chemical category made the largest contribution to the decrease in the monthly headline producer price index (PPI) after slowing by 1.5% month on month (a negative 0.4 percentage point contribution to the total).
The annual producer price inflation for July of 4.2% beat economists’ expectations of 4.5% after remaining at 4.6% in May and June.
The Bureau for Economic Research (BER) did indicate last week that the “downward surprise” in July’s consumer inflation suggested the slowdown in PPI could be more pronounced.
The increase in annual headline consumer inflation for July eased to 4.6%, the lowest rate since July 2021 and down from 5.1% in June. This figure came in below the consensus expectation of a slowdown to 4.8%, primarily due to softer price increases in the food category and transport, which slowed as a result of a fall in the fuel price.
Producer price inflation has decreased markedly from 2023’s average of 6.7% and is forecast to average close to 4% in 2024, partly because of petrol and diesel price cuts.
The BER expects PPI to continue trending downward for the remainder of 2024 and has forecast it to average below 3% in the fourth quarter.
Annual increases in prices for electricity and water led to PPI for this category increasing by 9.6% month on month. But agricultural prices slowed 2.6%.
Nedbank economists Johannes Khosa and Nicky Weimar said in a note that the deceleration seen in the basket for food, beverages and tobacco products, which contributed to the decrease in the annual producer inflation rate, was mostly due to downward pressure from fruit and vegetable prices, which rose 9.3% year on year compared with 10.9% in June. Declines in the price increases for sugar, oil and fats also contributed to the slowdown.
“However, grain mill products, starches and starch products, and animal feeds rose by 1% year on year, following eight months of contraction. The increase partly reflected the fading impact of last year’s high base, but probably also the impact of the drier weather conditions experienced earlier in the year,” Khosa and Weimar said.
Like the BER, they also expect factory prices to remain contained in the coming months. However, food inflation could start edging higher as the impact of drought on the summer maize harvest starts to filter through to food prices. This could be mitigated by lower global inflation and higher rainfall expected in the coming season.
“Fuel prices remain a significant concern to the outlook. While relatively subdued global demand and ample supply will keep oil prices in check over the short term, ongoing geopolitical tensions ... still pose upside risks. If the rand could maintain its resilience against the US dollar, it would help to mitigate the risks,” they said.
Jee-A can der Linde, senior economist at Oxford Economics, said they expected PPI inflation to average 3% during the second half of the year, after averaging 4.7% over the first six months.
The overall downward trend in inflation could support a decision by the Reserve Bank to start cutting rates this year.
Update: August 29 2024
This story has been updated with new comment and information.
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