The imprint was the lowest for producer price inflation (PPI) – also known as factory-gate prices – since 2013, when Statistics South Africa (Stats SA) changed the composition of the index. It follows Wednesday’s publication of CPI data which showed consumer inflation (CPI) had eased to 3.0% in April from 4.0% in March 2020, a 15-year low. At 3.0%, consumer inflation is also now at the bottom of the South African Reserve Bank’s (SARB’s) 3 to 6% target range.

Taken together, the inflation data supports the SARB’s case for the 275 basis points in cuts it has made to lending rates so far during 2020, with the bulk of that aimed at stimulating an economy laid low by the lockdowns which were first imposed in late March 2020. 

It also suggests how the contraction in economic activity in April 2020 has contained price pressures as unemployment has soared – a classic case of textbook economics. A collapse in demand and surge in unemployment would normally be expected to contain prices, unless the economy has serious structural imbalances or the central bank is cranking up the printing presses, a policy the SARB has pointedly refrained from even with its bond-buying programme. 

If inflation persists in a cratering economy with rapidly rising unemployment, you have “stagflation”, or Zimbabwe. South Africa has avoided that fate, and for that South Africans can be grateful to the SARB and its no-nonsense governor Lesetja Kganyago. 

The question now is how low can inflation go? April’s PPI numbers suggest CPI may slow further in coming months even as the economy gradually reboots. 

In a note to clients, NKC African Economics said its view was that the bottom was near: “We might still see a slight reduction in PPI inflation in May 2020, but we believe we have reached a trough and coming months should see an increase, albeit gradual, in producer price inflation.”

Time will tell if this is the case. If prices maintain their downhill trajectory, South Africa’s economy could also face the spectre of deflation, which is not a problem that policymakers here have had a lot of experience with. DM/BM