Producer price inflation soars above market expectations

FINANCIALLY-constrained consumers will continue paying higher prices for goods for a little longer as producer prices at the factory gate quickened more than expected in February due to geopolitical tension.

Data from Statistics South Africa (Stats SA) yesterday showed that annual headline producer price inflation (PPI) accelerated by 10.5 percent in February from a year before.

This PPI reading was above market expectations of a 10 percent rise, and was the highest since the 10.8 percent increase experienced in December.

Stats SA said the increase in producer prices was driven by elevated prices of coke, petroleum, chemical, rubber and plastic products which rose by 22.6 percent year-on-year, with petrol and diesel prices up more than 30 percent on an annual basis.

This primarily reflected the surge in global oil prices subsequent to Russia's attack on Ukraine and sanctions on Russia that constrained supplies.

Other notable price pressures stemmed from the metals, machinery, equipment and computing equipment category as it went up by 12.5 percent, affected by high commodity prices, exacerbated supply chain issues and elevated freight costs.

Food products, beverages and tobacco products increased by 6.2 percent, driven up by oils and fats, and the price of grain mill products, which reflected the spike in agricultural commodity prices, while meat and meat products' inflation softened slightly.

Fruit and vegetable prices have also been on an upward trajectory for the past three months, likely due to adverse weather in some provinces, which destroyed crops.

Nedbank economist Candice Reddy said the producer inflation was more pronounced in February than the market anticipated, which pointed to the impact of the conflict in Eastern Europe, combined with China's zero-Covid policy and associated lockdowns being worse than initially anticipated.

“The level of uncertainty is high, with much depending on the duration and severity of these issues,” Reddy said.

“Therefore global commodity prices, especially oil and food, are expected to apply the most upward pressure on prices throughout this year and possibly trickle into 2023.

“On the domestic front, steep utilities and higher cost of borrowing will place added pressure on production costs.”

However, Reddy said although cost pressures were mounting, a subdued economic environment will likely limit producers' ability to pass cost increases on to consumers.

On a monthly basis, Stats SA said producer prices inched up 1.1 percent in February, after a 0.2 percent increase in January and above market expectations of a 0.9 percent rise.