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Frederick Mitchell, Chief Economist | Aluma Capital (Pty) Ltd
Frederick Mitchell
September 26, 2024

Producer Price Inflation

Producer Price Inflation came increased by only 2.8%, much lower than market expectation of 4.0% for the month of August 2024. The lower-than-expected increase in producer inflation bode well for general inflation in the months to follow, but caution should be taken by the price increases in intermediate goods, especially price increases of administered goods and services such as water -and electricity prices and other municipal services that could affect inflation rates going forward.

Producer price inflation saw a significant decline in August 2024, falling from 4.2% in July to just 2.8%, with a modest monthly increase of 0.3%. Production costs for food and beverage items rose by 3.6% in August, contributing 1.1 percentage points to the total producer inflation for the month. The categories of metals, machinery, equipment, and computing also showed lower-than-expected price increases, rising by 3.5% year-on-year and adding 0.5 percentage points to overall producer inflation. The coke, petroleum, chemicals, rubber, and plastic products increased by 2.1% annually.

Some segments within the producer price inflation basket experienced deflation. Notable contractions were seen in the coke, petroleum, chemicals, rubber, and plastic products, which declined by 0.5% year-on-year, and the metals, machinery, equipment, and computing sector, which also contracted by 0.5% in August.

Production costs for intermediate goods remained steady at 4.2% from July to August 2024, with a slight monthly increase of 0.2%. The main contributors to this increase were basic and fabricated metals (2.2 percentage points) and chemicals, rubber, and plastic products (1.2 percentage points). Meanwhile, price increases for water and electricity remained high, registering a 7.2% annual rise in August, down from 10.2% in the previous month.

In the primary sector, mining costs contracted by 1.7%, an improvement from the 2.1% contraction seen in July 2024. Conversely, the agricultural sector recorded a 6.1% increase in production costs, up from 5.0% in July.

Overall, the trend in producer price inflation is encouraging for general inflation expectations in South Africa, as producer inflation is considered a leading indicator of overall inflation in the country’s economic context. However, the continued rise in prices for intermediate goods, particularly water and electricity, remains a concern, as these rates exceed the South African Reserve Bank’s (SARB) target range of 3% to 6%. This situation could hinder the further decline of inflation and impede potential interest rate cuts by the SARB’s Monetary Policy Committee (MPC) in the coming months.

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