Struggling rand bad news for producer inflation

While producer inflation moderated in September with the petrol price reprieve, analysts warn that inflation could accelerate as a result of the weaker rand as well as risks to food inflation and fuel price rises.

Factory and farm gate inflation, as measured by the annual change in the producer price index (PPI), eased in September to 6.2% from 6.3% the month before, Stats SA data showed on Thursday.

This is after energy minister Jeff Radebe approved a fuel price intervention that kept the petrol price increase capped at 5c/l in September.

However, upward pricing pressures were evident in various categories of the producer basket, which are probably reflective of some pass-through of recent rand depreciation to the production costs of factories and manufacturers, NKC African Economics economist Elize Kruger said.

“Producer inflation is likely to remain elevated over the coming months, mainly driven by a weaker rand,” said Nedbank economist Johannes Khosa.

Notably, manufactured food price inflation, which has provided a reprieve to the PPI basket over the past year, edged up to its highest level in a year in September to 1.3% year on year, from 0.5% in August, following six months of deflation.

The food products, beverages and tobacco products category is the biggest in the producer inflation basket and accounts for 34.8% of PPI.

“Prospects of a weak El Niño later in summer is a key upside risk to food inflation,” says Agbiz economist Wandile Sihlobo.

The weather phenomenon knocked SA hard in 2015 and 2016, driving food prices up as drought ravaged the country.

The fuel price increase in October is also expected to drive producer inflation higher, while data from the Central Energy Fund suggests there will be another hike in November.

The upward trend in PPI could spill over to consumer prices in time, driving the consumer price index (CPI) closer to the Reserve Bank’s 6% upper target level, said Kruger.

Producer inflation has traditionally been seen as an indicator of the consumer inflation figure three months later.

The annual change in the CPI is the key measure of inflation used by the Reserve Bank to set interest rates.

But given the speed of modern logistics, producer inflation increasingly moves in tandem with consumer inflation.

The Bank has said the upward trend in both consumer and producer price inflation cycles in recent months is “concerning”.