Stats SA has released another set of positive data for businesses in South Africa, with annual producer price inflation (PPI) easing even further.

Annual PPI (final manufactured goods) dropped from 4.8% in June 2023 to 2.7% in July 2023. There was also a 0.2% month-on-month increase in the PPI in July.

The latest Consumer Price Inflation (CPI) data also showed a drop from 5.4% in June to 4.6% in July.

This is now 0.1% off the South African Reserve Bank’s target range, with many economists believing that – as a result – SARB will not hike interest rates any further.

Although the SARB has remained wary over inflation, the drop in PPI should mean that consumer prices will continue to ease – albeit from a high base.

That said, Stats SA said that some sectors are still seeing much higher production costs. This includes:

• Food products, beverages and tobacco products (increased by 5.8% year-on-year and contributed 1.5 percentage points);

• Metals, machinery, equipment and computing equipment (increased by 9.0% year-on-year and contributed 1.3 percentage points);

• Paper and printed products (increased by 10.6% year-on-year and contributed 0.8 of a percentage point);

• Transport equipment (increased by 9.6% year-on-year and contributed 0.8 of a percentage point);

• Coke, petroleum, chemical, rubber and plastic products (decreased by 8.3% and contributed -2.5 percentage points)

Production costs in South Africa are affected by numerous factors, such as the strength of the rand, supply chain costs and the energy crisis.

According to Stats SA, this is how the various sectors performed:

• Intermediate manufactured goods: The annual percentage change in the PPI -0.1% in July 2023 (compared with 2.4% in June 2023). The index decreased by 2.0% month-on-month.

• Electricity and water: The annual percentage change in the PPI was 18.3% in July 2023 (compared with 13.6% in June 2023). The index increased by 8.5% month-on-month.

• Mining: The annual percentage change in the PPI was -0.5% in July 2023 (compared with 2.8% in June 2023). The index decreased by 2.0% month-on-month.

• Agriculture, forestry and fishing: the annual percentage change in the PPI was 6.5% in July 2023 (compared with 6.2% in June 2023). The index increased by 1.1% month-on-month.

Bumpy road ahead

Despite CPI and PPI data from July proving to be better than expected, economists at Nedbank warned that inflation will likely start ticking up again as the high year-on-year base effect disappears.

“However, it will remain relatively subdued, contained by lower fuel costs, falling food prices and generally weaker domestic demand,” it said.

“The upside risk will emanate from the weaker rand, which is likely to remain volatile amid choppy global risk appetites given the uncertain global growth outlook, higher US interest rates, concerns about the impact of electricity shortages on domestic growth prospects and potentially damaging political rhetoric ahead of next year’s elections.”

Load shedding will also increase input costs as companies turn to alternative energy sources, whilst the El Nino weather pattern will likely lead to upside risks for food prices and agricultural production.

“We forecast PPI to end the year at around 5%, averaging 6.7% in 2023, down from 14.3% in 2022.”

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