PRODUCER PRICE INDEX
SA factory gate price inflation hits 18% in July
Factory gate prices hit a fresh 14-year-high rate of increase of 18% in July from 16.2% in June, Statistics South Africa said on Thursday. This will feed into consumer inflation, but a peak may now have been scaled as diesel prices are in retreat.
At 18% in July, South Africa’s Producer Price Index (PPI) registered its highest rate of increase since August 2008, when it reached 19.1%. This comes in the wake of data on Wednesday, which showed the consumer price index (CPI) had accelerated to 7.8%, its most brisk rate in 13 years.
The bottom line is that the cost of living in South Africa is surging – hence Wednesday’s faltering attempt at a national shutdown – and pushing households into poverty and hunger against the backdrop of an unemployment rate of 33.9%.
The combined data this week seals the case that South Africa’s economy, which probably contracted in the previous quarter, is caught in the trap of stagflation. Almost all economic indicators are simply going the wrong way.
Still, there may be a glimmer of hope on the horizon.
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“PPI is correlating with diesel prices, and diesel prices dipped in August and we expect another decrease in September,” Jee-A van der Linde, an economist at Oxford Economics Africa, told Business Maverick.
Oxford Economics is of the view that PPI has reached or is near its peak, “but prices will probably remain sticky at elevated levels over the coming months”.
That prognosis is in line with other analyst views, and containing diesel price increases – crucial to production costs – will clearly be key. Diesel prices for producers were up almost 70% in the year to July, according to Stats SA. That’s a shocking number and represents a massive cost burden.
A lot remains uncertain, such as the direction of the volatile rand, which is currently close to 22-month lows below 17/dollar. Further rand weakness could boost diesel and oil prices even further.
Like this week’s CPI data, the latest PPI number will be high on the radar of the South African Reserve Bank (Sarb), which has hiked its key repo rate by 200 basis points since November last year, from record lows, in a bid to tame inflationary pressures.
Even if inflation subsides soon, Sarb is widely expected to maintain its hiking cycle for the rest of this year and quite possibly into 2023, as central banks worldwide tighten monetary policy. DM/BM