Producer inflation marches higher

Factory gate prices kept up their steady march higher in October, thanks in part to rising fuel costs, according to data from Stats SA.

Producer price inflation for final manufactured goods rose 8.1% year on year in October — the highest level since February 2016 — and up from September’s 7.8%. The outcome was largely in line with market expectations for 8%, according to a Bloomberg survey.

Thursday’s data comes after the Reserve Bank’s monetary policy committee meeting raised the benchmark interest rate to 3.75% last week, marking the start of what is likely to be a gradual normalisation of monetary policy.

The increase was the first since the start of the Covid-19 crisis that led to the Bank slashing rates by altogether 275 basis points during 2020. That came with a warning from governor Lesetja Kganyago of building inflation pressures, including higher oil and electricity prices, as well as a weaker currency and rising wage demands.

Rising energy prices globally and supply chain bottlenecks have stoked fear that this will continue to feed into rising consumer inflation, which has proved far less transitory that many monetary policy authorities first thought.

The Bank stressed, however, that interest rates remain “highly accommodative” and keep “financial conditions supportive of credit demand as the economy continues to recover”.

According to Stats SA, the main contributors to the rise in headline PPI were coke, petroleum, chemical, rubber and plastic products — which incorporates petrol and diesel prices that rose 26.5% and 28.1%, respectively — as well as food products, beverages and tobacco products; and metals, machinery, equipment and computing equipment.

Producer inflation is in line with global trends and expected to remain high into 2022, Nedbank economists Candice Reddy and Nicky Weimar said in a note. Supply chain disruptions, elevated shipping and container costs and still-high oil prices are expected to continue in the medium term. The weaker rand will put further strain on producers, they said.

“The presence of load-shedding, especially of such frequency and intensity, will strain productive capacity,” they added.

“These mounting cost-push pressures will probably be passed on to the consumer over the short term.”