Roving Report – Inflation in South Africa 2

Acknowledgements : Business Day


Inflation concerns as producer prices spike

THE producer price index (PPI), which measures the cost of goods as they leave the factory, accelerated 8.1% in February compared with a year ago, Statistics SA data showed on Thursday.

This spike raises concerns about the possible increase in general inflation as producers pass the costs to already struggling consumers.

The strong rise in producer inflation was driven mainly by higher food prices, particularly meat and fish, petroleum, transport equipment, and machinery prices. Food prices are rising after a severe drought last year caused production shortages and necessitated imports, which are more expensive because of a weak rand.

The cost of a basket of basic food items had risen about 10.9% in nominal terms from February last year to February this year, National Agricultural Marketing Council research found.

A combination of rising food prices and the effect of a sustained weak rand would likely continue to keep producer inflation elevated throughout the year, BNP Paribas Securities economist Jeff Schultz said.

Stats SA also released the PPIs for agriculture, forestry and fishing; intermediate manufactured goods, electricity and water, and mining.

Agriculture, forestry and fishing inflation was a high 24.9% year on year in February compared with 23.6% in January. Prices of agricultural products have been rising due to the severe drought.

More price increases are still expected as the effects of the drought continue to be felt.

Electricity and water inflation was 12.6% year on year in February from 11.6% in January on higher electricity and water costs. Municipalities will raise electricity and water tariffs in the next few months, a development that will affect future producer inflation numbers. The National Energy Regulator of SA has granted Eskom permission to increase electricity tariffs 9.4%.

Meanwhile, there was some positive news, as trade data released by the South African Revenue Service showed that the trade gap narrowed strongly to R1.1bn from R18bn in January as the growth in exports far outweighed that of imports. The data suggests that demand in SA’s trade partner countries is picking up and that the weak rand is curbing demand for imports.

Exports jumped 27% to R90.7bn while imports rose 2.7% to R91.75bn. Vehicles, precious metals, machinery and electronics, and vegetable products exports increased, while those for mineral products fell.

Although it was unlikely that the strong pace of export growth would be sustained, it was still “a positive sign of life” from an economy on the edge of a recession, Capital Economics Africa economist John Ashbourne said.

SA imported more vehicle and transport equipment, equipment components, textiles and vegetable products.

Machinery and electronics, and mineral product imports including crude oil, fell. The cumulative trade deficit for this year is R19bn — 38.5% lower than the shortfall recorded last year.