Throughout the first seven months of the year food price dynamics have been the main influencing factor on the moderation in manufacturing industry prices. Manufactured food price inflation peaked at 13.4% y/y in August 2016 and has steadily declined, to 3.3% y/y in July 2017.
As such the contribution from the food products, beverages and tobacco products category, which holds the largest weighting in the PPI basket at 33.7%, moderated to 1.2% in July from 1.6% in June, and from 4.0% in August 2016 (see figure 3).
The substantial drop in maize prices (presently down over 60% y/y) has resulted in disinflation at the agriculture level that has translated to lower inflation at the manufactured level. The effect has been partially countered by meat price inflation that has risen at a double digit pace since December 2016 to reach 17.8% y/y in July. Agbiz ascribes this increase to higher poultry prices in response to the avian influenza outbreak and cattle restocking after last year’s drought.
The rate of inflation in the coke, petroleum, chemical, rubber and plastic products category, which is the second largest PPI category with a weighting of 21.66%, has also steadily subsided, to 3.0% y/y from a prior 3.6% y/y. As such the contribution from this category receded slightly to 0.7% from 0.8% previously.
Within this category, the petrol and diesel price components contracted by 4.6% y/y 6.4% y/y respectively in view of the cumulative petrol and diesel price cuts of 93c/litre and 83c/litre in June and July.
The decline in the international price of oil and the appreciation of the rand have curbed inflationary pressures for the manufacturing industry. The US$ denominated Brent crude oil price is presently 8.8% lower than in January and futures prices suggest only a gradual rise in the coming years (see figure 1).
The lower electricity tariff increase this year will have alleviated manufacturing operating cost pressures. The tariff increase amounted to 2.2% compared to 9.4% in 2016. The PPI for electricity measured 4.9% y/y and 2.2% y/y in June and July, compared to 11.3% y/y and 6.9% y/y in June and July 2016. The seasonal tariff increases are typically captured in the month of June with a smaller follow through in July.
Weakening price pressures at both the producer and consumer levels should provide the SARB with scope for a further interest rate reduction this year. Overall, we expect a shallow rate cutting cycle as SA needs to maintain competitive real interest rates if substantial rand depreciation is to be avoided.