27 Sep 2017

PPI update: PPI inflation rises in August on higher fuel prices but food price disinflation remains intact

Annabel Bishop

Chief Economist

PPI inflation lifted to 4.2% y/y in August from 3.6% y/y in July, mainly on account of the fuel price component, which reflected the impact of upward statistical base effects combined with some upward pressure stemming from the increases in the international oil price in July and August.

Figure 1: Petrol and Brent crude oil prices
  • PPI inflation lifted to 4.2% y/y in August from 3.6% y/y in July, mainly on account of the fuel price component, which reflected the impact of upward statistical base effects combined with some upward pressure stemming from the increases in the international oil price in July and August.
  • Specifically, the rate of inflation in the coke, petroleum, chemical, rubber and plastic products component accelerated to 7.3% y/y from 3.0% y/y in July on petrol and diesel price increases of 19 and 29 c/litre respectively. 
  • Based on a weighting of 21.66%, this translated to a higher contribution to headline PPI of 1.6% in August compared to 0.7% previously (see figure 3). 
  • Another sizeable contribution can be expected in September owing to the substantial 67 and 44c/litre price increases for petrol and diesel respectively.
  • The August PPI update confirmed continued manufactured food price disinflation. The contribution to headline PPI from the food, beverages and tobacco products category decreased to 1.0% in August from 1.2% previously. 
  • 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 1.9% y/y in August 2017 on the favourable maize supply outlook. Indeed, 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 August print showed a moderation to 16.8% y/y from a prior 17.8% y/y, partly “on the back of an uptick in slaughtering activity” according to Agbiz. A further moderation in the coming months would bode well for meat price inflation at the consumer level. 
  • PPI inflation is likely to moderate again in Q4.17 whilst CPI inflation is expected to remain well within target, which should provide the SARB with the scope for a further interest rate reduction. We expect a shallow easing cycle as SA needs to maintain competitive real interest rates in order to avoid substantial rand depreciation.
Figure 2: PPI inflation (%)
Figure 3: Contributions to PPI inflation
Food prices at the agriculture, manufactured and retail level