Producer price inflation enters deflation

Producer price inflation entered deflation in October, contracting to 0.7% from 1.0 % in September, again driven by the slowdown in the coke, petroleum, chemicals, rubber and plastic products category.

According to Statistics SA, the disinflation in coke, petroleum, chemicals, rubber and plastic products continued for a second consecutive month in October, doubling the previous month’s contraction and falling by 10.1% from 5%.

Matimba Johannes Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, say the steep contraction reflects lower fuel costs, which continued to benefit from soft global crude oil prices and a stronger rand.

“The Brent crude oil prices declined by 24.6% over September, while the rand appreciated by 5.8% over the same period, driving local petrol prices down by 22.2% and diesel prices down by 26.9% in October.”

Chemical products also moderated further but the prices of rubber and plastic products accelerated for a second straight month, up 7.6% from 5.6%.

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Producer price inflation for metals, machinery and equipment

Inflation for metals, machinery and equipment, including computers, eased to 3.1% from 3.4%, driven by declines in structural and fabricated metal products and general and special-purpose machinery. In contrast, household appliances and office machinery increased for a fifth straight month.

On the other hand, inflation for food, beverages and tobacco products eased to 3.6% in October after increasing to 3.8% in September and 3.6% in August. Most of the food categories eased during the month, with the largest declines recorded in oils and fats (-11.9% from -10.6%), meat and meat products (-1.1% from 1.7%), fruit and vegetables (9.9% from 12.9%) and dairy products (2.6% from 3.1%).

The grain mill products, starches and starch products, and animal feeds continued their upward trend, climbing for a sixth consecutive month to 3.5% from 2.4% in September.

Producer price inflation (PPI) for intermediate manufactured goods accelerated to 5.5% in October, its highest level since January 2023, when it was 5.6%.

Khosa and Weimar say the upward pressure mainly emanated from the basic precious and non-ferrous metals subcomponent, which climbed by double digits to 12% from 4.5%.

However, increases in sawmilling and wood and basic and fabricated metals and a slower contraction in textiles and leather goods also contributed to the upside. All the other subcomponents eased further or remained steady.

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Producer price inflation for electricity and water

PPI for electricity and water increased to 11.2%, up from 9.8% in September and 7.1% in August. The increase reflects an increase of 12.2% (from 10.6%) in electricity prices, while water tariffs were steady at 5.6%.

The disinflation in mining stalled in October, with prices unchanged at -4.8%. Khosa and Weimar say the stall in prices is due to a notable moderation in the decline of non-ferrous metal ores, while that of coal and gas and stone quarrying, clay and diamonds continued.

The prices of gold and other metal ores, the only sub-component with positive growth, eased slightly.

PPI for agriculture, forestry and fishing fell by 0.3% in October from 3.6%, led by declines in most agricultural subcomponents.

Khosa and Weimar say they expected PPI for October to come in at 0.0%, while the market expected 0.5%.

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Sharp deceleration in PPI from a high base

“The sharp deceleration in producer inflation mainly reflects the impact of last year’s higher base and much lower fuel prices. The base effect will gradually reverse and factory prices will drift up throughout 2025.

“However, the upside will be contained by generally subdued global and domestic price pressures. Global disinflation largely continued in most economies, deviating slightly but trending close to central bank targets.”

They say lower global oil prices, a steady rand and favourable weather conditions will continue to exert downward pressure on producer prices, but they also warn that there are upside risks to the outlook.

“Despite supportive weather conditions, food prices will likely increase off a lower base, partly due to higher global prices. Fuel prices will probably ease further, albeit at a slower pace, due to subdued global oil prices caused by muted world demand.

“However, the uncertainty surrounding the Israel-Hamas tensions raises concerns of a possible resurgence in oil prices. The rand remains resilient but lost some ground following the US elections and will likely face further upside pressure amid the uncertainty surrounding the changes in US economic policy.”

Although the pressure of domestic structural inefficiencies on operating costs has eased notably in 2024, Khosa and Weimar say it remains high and continues to pose an upside risk to producer prices. They forecast PPI to end 2024 at 2.4%, averaging 3.3% for the full year.