PPI inflation hero image

28 Mar 2018

PPI update: inflation falls sharply as rand strength lowers fuel prices, food price deflation occurs and base effects assist

Annabel Bishop

Chief Economist

Figure 1: Food price inflation – CPI vs PPI
  • PPI inflation fell to 4.2% y/y in February from 5.1% y/y in January, on food price deflation, with grain mill products falling 17.2% y/y, and statistical base effects as PPI inflation rose significantly a year ago.
  • Agbiz notes “South Africa’s 2017/18 total maize production estimate was revised upwards by 2% from last month to 12.42 million tonnes. Of this, 6.36 million tonnes is white maize, with yellow maize at 6.06 million tonnes. While lower than last season’s record harvest of 16.82 million tonnes, this is well above market expectations of a fairly small harvest. Importantly, this is higher than South Africa’s annual maize consumption of roughly 10.50 million tonnes.”
  • Agbiz adds “(a)lso worth noting is that this expected harvest coupled with expected large carryover stock underpin the view that South Africa could remain a net exporter of maize in the 2018/19 marketing year which starts on 01 May 2018, with exports estimated at 2.2 million tonnes.”
  • The lag between maize prices and CPI food price inflation means some future downwards price pressure is likely this year. We continue to expect consumer food price inflation will remain in low single digits this year, helping to keep CPI inflation below 5.0% y/y for the year.
  • The diesel price fell by 17c/litre in February, and in March a 47c/litre cut occurred on rand strength. However, in April around a 60c/litre hike will occur on the back of the hikes in government taxes and levies announced in the budget. We expect the oil price to average US$66/bbl this year.
  • PPI inflation is likely to come out at 3.8% y/y for 2018 as food price inflation remains suppressed, the rand’s previous strength feeds through somewhat further and base effects from 2017’s drought continue to unwind.
Figure 2: PPI inflation (%)
Figure 3: SA’s PPI inflation vs CPI inflation
  • Other commodity prices which placed upwards pressure on the annual PPI inflation rate in February were paper and paper products, non-metallic mineral products.
  • The International Grains Council’s preliminary forecast “placed 2018/19 global wheat production at 741 million tonnes, down by 2 percent from the previous season. The notable decline is expected to be driven by a fall in output in countries such as Russia, Argentina, Kazakhstan, India and the EU region. This is both on the back of expected poor yields in some regions, as well as expectations of a decline in area planting after the 2017/18 higher yields. Meanwhile, the US and Australia are expected to show a slight recovery from 2017/18 lower harvest.”(Agbiz)
  • For South Africa, the 2018/19 winter wheat season is expected to be much improved on last year’s given the recovery from the drought. Indeed, the South African Weather Service indicates above-normal rainfall for parts of the south-western cape between April and June 2018. Moderate wheat prices should be helpful to the 2018 PPI inflation outcomes later in the year.
  • The South African Reserve Bank recently said “the risks to the inflation outlook have subsided somewhat. F The affirmation of South Africa’s sovereign rating as ‘investment grade’ and the change of the outlook from negative to stable by Moody’s Investors Service has contributed to the recent rand resilience.”
Figure 4: SA’s PPI inflation vs Diesel price