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Producer Price Index leaps to 6.7% in April, signalling mounting inflation pressures

Producer Price Index leaps to 6.7% in April, signalling mounting inflation pressures
(Image: Adobe Stock)

Factory gate prices hit a two-and-a-half-year high in April, accelerating to 6.7% year on year from 5.2% in March, Statistics South Africa said on Thursday. This is the strongest indication yet that inflation pressures are building in the economy, largely because of the surge in oil prices. Still, it does not mean consumer prices will follow the same trajectory.

April’s 6.7% Producer Price Index (PPI) reading, which was the highest since November 2018 when it reached 6.8%, shows price pressures are building in the economy’s pipeline. Among other things, this gives the South African Reserve Bank (Sarb) more reason not to cut interest rates, and points to the next move down the road as being upward. 

The main drivers included coke, petroleum, chemical and rubber and plastic products, which increased 11.9% year on year on the back of petrol prices rising 27.8% over the period, and diesel prices spiking 16.6%. 

Consumer prices in April also accelerated sharply, to 4.4% from 3.2% in March. Still, economists do not expect CPI to breach 6% this year, which is the upper band of Sarb’s 3% to 6% inflation target range. 

“We still expect CPI to remain in the target range, barring any further shocks to the economy. Through the value chain, businesses know that consumers are struggling so they are trying to absorb the costs and not pass it on to the consumers,” Pieter du Preez of NKC African Economics told Business Maverick

This may not be the case with all producers. Astral Foods, South Africa’s top poultry producer, recently said it would pass higher feed costs on to consumers as its margins get squeezed. 

That suggests pressure may remain on meat prices but Wandile Sihlobo, chief economist of the Agricultural Business Chamber of South Africa, noted that food PPI had slowed from 8.1% year on year in March to 7.9% in April. 

He said while grain prices had remained elevated because of global trends, that situation was changing as weather conditions improved in the United States. 

“My view is still that domestic grain prices will soften as we go into the second half of the year,” he said, noting that South Africa is expected to reap a bumper maize crop this season.  

Overall, a lot will hinge on oil prices in the coming months, as well as the performance of the rand, which has been perky of late, hitting its highest levels against the dollar this week in almost two years – at below 14/$, the rand can maintain or extend its gains. That should help to contain factory gate and broader price pressures in the economy. DM/BM

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