The South African economy has shown resilience by withstanding a 144c petrol price increase over the past two years, but production costs threaten a benign outlook, figures released this week show.
On Wednesday, Statistics South Africa (Stats SA) reported that inflation excluding mortgage rates (CPIX) rose 3,7% in April. This was slightly below forecast.
The picture changed markedly on Thursday when Stats SA reported that the producer price index (PPI) rose 5,5% in the year to April, up from 5,4% in March and above an I-Net Bridge forecast of 5,2%. On a monthly basis, PPI rose by 1% in April compared with 0,4%. PPI is a leading indicator for consumer inflation as it shows what producers are likely to charge in the months ahead, thereby influencing consumer inflation.
Annabel Bishop, an economist, pointed to resilience in the South African economy. She noted that since the end of 2004, petrol has increased by R1,44 per litre, yet there have been no signs of the second-round effects — the second-tier price increase that occurs when producers pass increased transport costs on to consumers. Bishop also noted that adverse weather conditions have a negative affect on food prices.
On the rise in PPI, Bishop points to oil prices as a major culprit, with additional pressure in the food, beverage and electricity production categories.
Overall, the economy has been protected from rampant inflation by the strong rand, which diminishes the effect of imported inflation. The rand will also be key in determining whether interest rates remain unchanged or go up. The rand has depreciated by 10% to about R6,60 to the dollar over the past week or so.
Colen Garrow, an economist at Brait, said although PPI was worse than expected, it was not enough to move rates at the Monetary Policy Committee meeting in June. But, with the rand weakening, Garrow noted that “the [Reserve Bank] could move rates” at some stage later in the year.
Bishop forecasts rates to remain unchanged for the year, with a minimal but unlikely risk of a 0,5% hike.
Additional reporting by I-Net Bridge