25 Oct 2017

PPI update: Higher fuel price inflation lifts PPI inflation for the second consecutive month

Annabel Bishop

Chief Economist

PPI inflation rose at a rate of 5.2% y/y in September compared to 4.2% y/y in August, mainly on account of the petroleum price component.

Figure 1: PPI inflation and Brent crude oil prices
  • PPI inflation rose at a rate of 5.2% y/y in September compared to 4.2% y/y in August, mainly on account of the petroleum price component. 
  • The coke, petroleum, chemical, rubber and plastic products component was the largest contributor to headline PPI (see figure 3). Specifically, based on a weighting of 21.66%, the acceleration in the inflation rate, to 10.9% y/y in September from 7.3% y/y previously, translated to a higher contribution of 2.4% versus a prior 1.6%. 
  • A key influencing factor on this component will have been the substantial 67 and 44c/litre price increases for petrol and diesel respectively in the month of September. The upward fuel price pressures should abate somewhat in October with the Department of Energy currently estimating a petrol price increase of only 3.2c/litre.
  • The September PPI update continued to reflect manufactured food price disinflation. The contribution to headline PPI from the food, beverages and tobacco products category decreased for the ninth consecutive month to 0.9% in September from 1.0% in August.
  • Overall, the decreasing contribution from the food products, beverages and tobacco products category, which holds the largest weighting in the PPI basket at 33.7%, has been the main influencing factor on the broader moderation in PPI inflation so far this year. Manufactured food price inflation peaked at 13.4% y/y in August 2016 and has steadily declined, to 1.3% y/y in September 2017 on the favourable maize supply outlook. Earlier in the supply chain, grain prices have been in deflation since the start of the year which has contributed to lower inflation at the manufactured level (see figure 4). 
  • The grain price effect has been partially countered by meat price inflation that has risen at a double digit pace since December 2016. However, the rate of inflation subsided in both August and September and a further moderation in the coming months would bode well for meat price inflation at the consumer level. 
  • The deterioration in government debt and deficit projections presented in the Medium Term Budget Policy Statement substantially heightens the risk of a credit rating downgrade to sub investment grade. Rand weakness will lift inflation which eliminates the scope for any further interest rate cuts in the current cycle. 
Figure 2: PPI inflation (%)
Figure 3: Contributions to PPI inflation
Figure 4: Food prices at the agriculture, manufactured and retail level