Major red flags for inflation in South Africa

A worse-than-expected inflation figure for producers spells bad news for South African consumers at the till.

According to Stats SA, annual producer price inflation increased from 2.7% in July 2023 to 4.3% in August 2023.

The producer price index (PPI) also increased by 1.0% month-on-month in August 2023.

This is far higher than the Nedbank and Absa forecasts of 3.7%, raising red flags for consumer inflation (CPI) in the coming months.

As PPI measures inflation from the producer’s perspective before costs hit consumers, an increase in PPI is likely to increase in CPI.

Stats SA said that the main contributors to the headline PPI annual inflation rate were:

• Metals, machinery, equipment and computing equipment (increased by 10.1% year-on-year and contributed 1.4 percentage points);

• Food products, beverages and tobacco products (increased by 4,9% year-on-year and contributed 1.3 percentage points); and

• Paper and printed products (increased by 13.4% year-on-year and contributed 1.1 percentage points) –

Economists at Nedbank said that they expect inflation to tick higher in the coming months as the base effects start to dissipate.

“The upward pressure will continue to come from higher local input costs, including electricity tariffs, increased use of diesel generators or the expense of installing alternative electricity sources due to persistent load shedding,” the economists said.

“At the same time, the rand remains volatile due to choppy global risk appetites given the uncertain global growth outlook, the threat that US interest rates could stay higher for longer, concerns about the impact of electricity shortages on domestic growth prospects and political rhetoric ahead of next year’s elections.”

Global oil prices have also risen sharply recently after several major oil producers decided to limit output.

The El Nino weather pattern will likely also create drier conditions, impacting agricultural production and food prices.

“These could cause food and fuel prices to settle higher than anticipated,” Nedbank’s economists said.

Read: Good times for inflation in South Africa are over: Nedbank