24 Jan 2018

PPI update: PPI inflation lifts in December on fuel prices

Annabel Bishop

Chief Economist

Rand resilience to stem commodity price pressures in the months ahead

Figure 1: Petrol price and spot prices of Brent Crude oil
  • Producer price inflation for December lifted to 5.2% y/y from 5.1% y/y in November. Similar to the December CPI outcome released yesterday, the slightly higher rate of inflation was driven by renewed upward fuel price pressures. 
  • In December, petrol and diesel prices rose by 71 and 60c/litre respectively, on the combination of a higher international oil price and a weaker rand. In November, the petrol and diesel price increases were comparatively smaller, at 4 and 23c/litre respectively.
  • As such, the contribution to headline PPI of the coke, petroleum, chemical, rubber and plastic products component increased to 2.9% in December from 2.2% in November (see figure 3), on an inflation rate of 13.5% y/y versus a prior 9.9% y/y. This component holds the second largest weighting in the PPI basket of 21.66%.
  • Fuel price pressures are expected to abate in Q1.18 with petrol and diesel prices cuts of 34 and 22 c/litre in January, with a further 32c/litre petrol price reduction currently estimated by the Department of Energy for February. 
  • In the months ahead, the rand will play a key role in stemming cost pressures from global commodity prices. Global commodity price recorded a substantial lift over December and into January (see figure 4). The rise has been linked to indications of a continued strengthening in global economic activity and global trade momentum.
  • In terms of oil prices, in January, Brent crude advanced to USD70.8/bbl from USD66.78/bbl the prior month which translated into an increase of 27.1% y/y. By comparison, the rand price of oil increased by a lower 12.1% y/y, to R840.99/bbl with the nominal rand appreciating by 11.9% y/y against the USD (see figure 1). 
  • In December, inflationary pressures in the remainder of the PPI basket either remained steady or moderated, with the contributions to the headline PPI therefore remaining unchanged from November or declining (see figure 3).
  • There is scope for PPI inflation to moderate this year, should rand appreciation be sustained as this would contribute to shielding the economy from imported commodity price inflation. In addition, domestic food price inflation at both the manufactured and retail level should remain well contained by the ample national maize supplies.
Figure 2: PPI inflation (%)
Figure 3: Contributions to PPI inflation
Figure 4: Bloomberg industrial metals index