PPI update: Continued food price disinflation underpinned the moderation in PPI inflation to 5.0% y/y in October from 5.2% y/y

29 Nov 2017

Annabel Bishop

Chief Economist

PPI inflation moderated to 5.0% y/y in October from 5.2% y/y in September.

Figure 1: Food prices at the agriculture and manufactured levels
  • PPI inflation moderated to 5.0% y/y in October from 5.2% y/y in September.
  • The moderation can be ascribed mainly to a smaller contribution of 0.5% to headline PPI from the food products, beverages and tobacco products category, compared to a contribution of 0.9% in September (see figure 3).
  • This category holds the largest weighting in the PPI basket at 33.7% and has experienced steady disinflation to 1.5% y/y in October from the recent peak of 11.3% y/y in October 2016. Within this category food price dynamics have been the main driver.
  • Manufactured food price inflation subsided to 0.4% y/y in October from a peak of 13.4% y/y in August 2016, on agricultural price dynamics. Specifically, at the agricultural level, grain prices have been in deflation throughout the year which has contributed to lower inflation at the manufactured level. A record maize harvest in 2016/17 has supported the decline in maize prices (see figure 4). Maize prices are likely to remain at lower levels in view of the favourable maize supply outlook. According to Agbiz “farmers intend to increase the summer crop area plantings for the 2017/18 (<). Additionally, the weather outlook for the upcoming summer season is favourable, which increases a possibility of yet another good crop.”
  • Although meat price inflation remained in the double digit range, encouragingly it subsided for the third consecutive month to 12.6% y/y. A further moderation in the coming months would bode well for meat price inflation at the consumer level.
  • The coke, petroleum, chemical, rubber and plastic products component, which is the second largest contributor to headline PPI with a weighting of 21.66%, made the largest contribution of 2.4%, on an inflation rate of 11.2% y/y in October versus 10.9% y/y in September.
  • The petrol and diesel petrol price hikes in each of the months since August have boosted inflation in this category.
  • In its last MPC statement in November, the SARB reiterated that the balance of risk to the inflation profile remains to the upside. The risks include the rand exchange rate, the pace of global monetary policy normalisation and electricity tariffs. The risks remain prominent ahead of the ANC elective conference, the 2018 Budget and the credit rating agency reviews in April 2018. As such, the scope for further interest rate cuts has diminished.
Figure 2: PPI inflation (%)
Figure 3: Contributions to PPI inflation
Figure 4: White and yellow maize prices