Producer price inflation rises to 4.3% for August

Producer inflation rose in August reflecting the upward pressure emanating from higher local input costs caused by increased electricity tariffs, load-shedding, as well as rising food and fuel prices.

Stats SA on Thursday showed producer price inflation (PPI) rose to 4.3% year on year in August, above market expectations of 3.7% and ending a sequence of 12 months of decline.

Producer inflation measures changes in the prices of goods bought and sold by manufacturers and is considered a key indicator of future consumer inflation. Producers can either absorb high input cost increases or pass them on to consumers.

Nedbank senior economist Johannes Khosa said the volatile rand also remains a threat due to choppy global risk appetite given the uncertain global growth outlook. “Producer prices are also affected by the threat that US interest rates could stay higher for longer, concerns about the effects of electricity shortages on domestic growth prospects and political rhetoric ahead of next year’s elections,” Khosa said. “The El Niño weather pattern also poses upside risks for agricultural production and food prices. These could cause food and fuel prices to settle higher than anticipated.”

He said the August reading points to the increased use of diesel generators as well as the expense of installing alternative electricity sources due to persistent load-shedding.

A breakdown of the data shows that the metals, machinery, equipment and computing equipment; paper and printed products as well as food products, beverages and tobacco products categories were the main contributors to the acceleration in overall producer inflation. Metals, machinery, equipment and computing equipment increased 10.1% year on year and contributed 1.4 percentage points to the overall inflation, from 9% in July.

Khosa said the continued rise in that category was driven by higher demand for renewable energy equipment as companies and households invest in alternative sources of electricity, combined with a weaker rand and higher production costs.

Agency data shows PPI for electricity and water remained elevated at 17.9%, but eased from 18.3% in July when the higher electricity tariffs kicked in. Stats SA said electricity prices rose 18.7% year on year from 19.1%, while the increase in water prices was unchanged at 8.6%.

Inflation in the food products, beverages and tobacco products category also contributed to increases in August. However, the annual rate of increase continued to moderate off a higher base, falling to 4.9% from 5.8%.

Prices of paper and printed products rose 13.4% year on year from 10.6%, also making a higher contribution to PPI.

PPI for agriculture, forestry, and fishing edged down to 6.3% from 6.5%. The downward pressure came from live animals and animal products and forestry, which fell by 2.3% and 3.5% respectively. Prices of crops and horticulture and fishing rose.

Investec economist Lara Hodes said a rise in the global oil price combined with a depreciation of the rand has seen fuel prices lift notably in September, with a further marked hike building for October, which will add upside pressure in the coming months.

Absa senior economist Miyelani Maluleke said that as with the consumer price index data, the strong base effects on fuel that have driven a big part of the disinflation trend in recent months have largely run their course.