Declining fuel and food prices saw SA’s producer prices moving into deflationary territory in October as inflation continued its downward trend.
As companies benefit from lower prices, the PPI contraction could contribute to the easing of consumer price inflation in the coming months, with October recording the lowest annual rate of consumer price inflation since June 2020.
SA’s producer price index (PPI) contracted by 0.7% year on year in October after a 1% increase in the previous month, outperforming consensus expectations of deflation of 0.2%.
The primary driver was a lower fuel price, with petrol and diesel prices declining by 22.2% and 26.9% year on year, respectively. As a result, the cost of coal and petroleum products was down 18.6% year on year compared to a 10.6% decline in September.
Fuel price cuts saw the coke, petroleum, chemical, rubber and plastic products category shaving 2.5% points off the month’s headline inflation outcome. This month, however, the rand’s depreciation had driven a modest lift in fuel prices, which would weigh on November’s inflation outcome, Investec economist Lara Hodes said.
Another key driver was food products, beverages and tobacco products, a category which makes up nearly 30% of the PPI index, and added 1% point to October’s headline number as manufactured food price inflation eased to 3.4% year on year, from 4.1% in September.
International food prices at the agricultural level also fell in October, declining by 2.1% from the previous month, compared with a 4.8% month on month increase in September.
“These are a key contributor to local food costs, as SA is a price-taker for most agricultural food produced through either import, or export, parity pricing,” Hodes said.
Prices also fell for paper and printed products, down 1.5% year on year in October compared with a 2.3% increase in the previous month, and for transport equipment, down 0.9% year on year.
The improved inflation outcome is in line with October’s consumer price index (CPI) released earlier this month by Stats SA, which showed consumer price inflation easing for a fifth consecutive month in October to 2.8% year on year.
However, CPI inflation is set to rise to 3.2% year on year this month and continue rising in December, driven by low base effects from a year ago and a 25c/l petrol price hike implemented in October, Investec chief economist Annabel Bishop said.
“Instead of seeing a fuel price cut, as has been the case for the past five months, a hike occurred, and CPI inflation will rise back above 3% year on year this month,” she said.
Bishop predicted that CPI inflation would close the year at 3.5%, followed by a low inflation period over 2025, with headline inflation staying below the Reserve Bank’s 4.5% midpoint target and averaging about 4% year on year.
On Wednesday, the IMF released its annual consultation report on SA praising the country’s inflation targeting framework and voicing support for a lower inflation target. “Shifting from the current target band to a lower-point target at an appropriate time could help lower expectations and inflation, supporting medium-term macroeconomic stability,” it said.
The statement warned that SA’s inflation differential with its primary trading partners puts pressure on the exchange rate, and close co-ordination between the Treasury and the Bank “will be critical to support credibility and anchor expectations”.
“A well-calibrated band can help provide flexibility given the volatile and shock-prone global environment,” it said.
This echoes earlier calls by Bank governor Lesetja Kganyago to lower SA’s inflation target in line with its global competitors, but the decision to lower the target belongs to the Treasury.
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