31 Jul 2017

PPI update: PPI inflation falls below market expectations on lower food and fuel price inflation

Annabel Bishop

Chief Economic

PPI inflation fell to 4.0% y/y in June, from 4.8% y/y recorded in May, below market expectations of 4.4% y/y. Food and fuel price dynamics were the key drivers.  

PPI Figure 1

The drop in food price inflation was heavily influenced by lower yellow and white maize prices, due to expectations of a bumper maize harvest of sixteen million tons this year.

Food price inflation at the agricultural level contracted for the sixth consecutive month, by 3.0% y/y versus
2.0% y/y in May. This was largely due to cereals and other crop prices having contracted by 39.9% y/y after white and yellow maize prices declined (see figure 3).

Indeed, the contribution of the food products, beverages and tobacco products to headline y/y PPI inflation decreased to 1.6% from a prior months 1.9%, with manufactured food price inflation decelerated to 4.7% y/y in June from 5.7% y/y in May, the lowest value recorded since 2015.

The contribution to headline PPI inflation from the coke, petroleum, chemical, rubber and plastic products category was the other main contributor to the lower than expected PPI outcome, decreasing to 0.8% in June from 1.6% in May, falling from growth of 7.2% y/y in May to 3.6% y/y in June. Within this category, petrol and diesel price inflation components decelerated to 1.9% y/y from 8.8% y/y and to 2.5% y/y from 12.3% y/y, respectively. This ultimately halved the contributions of the petroleum component of the basket to headline PPI inflation (see figure 3).

Both PPI and CPI inflation are expected to moderate further in 2017, aided by lower global oil prices, a moderation in food price increases, lower-than anticipated electricity tariffs and a more resilient currency. Although the SARB noted the resilience of the rand to date, upside risks to the rand were cited as “heightened political uncertainty, global monetary policy developments and possible further credit ratings downgrades.”

PPI Figure 2
PPI Figure 3

The drop off in coke, petroleum, chemical, rubber and plastic products inflation stemmed from the petrol and diesel price cuts of 25c/litre and 23c/litre respectively, which took effect in June. These cuts stemmed from lower crude oil prices in June coupled with rand appreciation, which translated to a lower rand-denominated oil price.

Brent crude oil prices in June which averaged US$48/bbl, were down 4.4% from levels seen a year ago. The lower crude oil prices followed an increase in US crude oil inventories, which fueled concerns that markets remained oversupplied despite efforts by top producers to cut output.

The stronger rand also helped lower the cost of imports of raw materials and intermediate goods used in the local production process, aiding in the lower headline PPI outcome. Prices of intermediate manufactured goods rose by only 2.1% y/y in June versus by 3.1% in May. 

Following the substantial petrol and diesel price cuts in July of 68c/litre and 60c/litre, respectively, the contributions stemming from the coke, petroleum, chemical, rubber and plastic products category is expected to further recede in the coming months.  

PPI Figure 4