After falling in October and November, SA’s producer prices returned to inflationary territory last month increasing 0.7% year on year according to Stats SA's producer price index (PPI).
This follows a 0.1% PPI contraction in November and a 0.7% contraction in October with December's higher headline reading being primarily driven by a 4.2% increase in food, beverages and tobacco products prices.
Despite the uptick in producer prices, inflation remained at the lower end of the SA Reserve Bank’s 3%-6% target range in December, with the consumer price index (CPI) expanding by 3% compared to the same month in 2023.
Annual inflation has remained below the Bank’s 4.5% midpoint target since August, making a further rate cut at Thursday’s MPC meeting highly likely.
The Bank is expected to lower rates by another 25 basis points (bps), taking its key lending rate to 7.5%, according to Bloomberg's consensus forecast.
In line with the headline PPI increase, producer prices for intermediate manufactured goods were up 5.8% year on year in December as a result of higher basic and fabricated metals prices, while the PPI for agriculture increased by 4.3%.
Despite the improved availability of electricity, the rising cost of power remained a critical constraint on SA businesses, with the PPI for electricity and water increasing by 10.3% compared to one year prior.
However, falling coal and gas prices provided some encouragement to the mining sector, with the PPI for mining contracting by 1.5% in December after a 0.2% contraction in the previous month.
Despite the US Federal Reserve opting to hold rates steady on Wednesday as the country struggles to curb its own inflationary pressures, SA has enjoyed persistently low rates of inflation, a strong exchange rate relative to other emerging currencies and inflation expectations that remain anchored within the Bank's target range.
However, Old Mutual chief economist Johann Els predicted that Bank governor Lesetja Kganyago would adopt a more hawkish tone at Thursday’s MPC meeting than he did in November, in response to uncertainty about US policy under President Donald Trump.
The new Trump administration could see the US imposing hefty tariffs on key trading partners in the coming months, with Trump threatening a 25% tax on goods from Mexico and Canada and a 60% tariff on all Chinese-made goods coming into the country.
These tariffs, combined with protectionist tax cuts, could put upward pressure on prices, fuelling higher and more stubborn inflation.
Last week, Kganyago voiced concerns about Trump’s potentially inflationary trade policies, saying: “To the extent that the measures taken are inflationary, it could slow down the disinflation process that central banks had so steadfastly worked on since the great inflation of 2022.
“The reduction in the restrictiveness of monetary policy that we had seen over the past year could then be brought to an abrupt halt,” Kganyago said.
Further monetary easing is expected to spur investment and economic activity in the coming months, with Reserve Bank data released on Thursday showing SA’s private sector credit extension (PSCE) underperformed Bloomberg's consensus forecast in December.
According to the Reserve, PSCE rose by 3.8% year on year, easing from 4.2% in the previous month. Credit uptake by corporates, which makes up more than half of total PSCE, was up 4.6% thanks to an increase in general loans and advances.
This came as mortgage advances to corporates increased by 5.3% year on year, reflecting continued positive sentiment among non-residential builders, but growth in the investment category was minimal as business confidence remained in depressed territory in the final quarter.
At the household level, credit demand was up 3% year on year in December, largely flat from the previous month’s 3.1%. Mortgage advances grew by 2.3%, while credit growth in the instalment sale credit and leasing finance category eased somewhat.
Further monetary easing this week, together with a lift in sentiment, is expected to boost investment and activity in the property sector and buoy demand for vehicle sales, said Investec economist Lara Hodes.
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