At 16.6% on an annual basis, South Africa’s Producer Price Index (PPI) remains firmly embedded in double-digit territory and likely will not ease into single digits any time soon. But, like consumer inflation, the peak has perhaps been scaled, though a lot will hinge on what the rand/dollar exchange rate and oil prices do for the rest of the year. And the rand, like most major currencies, is currently on the ropes, fetching close to 18/dollar. 

PPI’s August read follows that for CPI, which slowed to 7.6% in August from a 13-year-high rate of increase of 7.8% in July. The main factor driving both indicators has been the falling global price of oil – the same factor that has fuelled the inflationary surge this year, in large part a consequence of Russia’s war in Ukraine. 

Over the course of July and August, the benchmark Brent crude contract fell 12% from more than $110 a barrel to below $100, and has maintained its slide on growing jitters of a looming global recession. So, its performance is really a double-edged sword. 

Still, it has brought much-needed relief at the pumps for South African consumers, even as it remains the main driving force behind supply-side inflationary pressures in the economy. 

Stats SA said the prices of “Coke, petroleum, chemical, rubber and plastic products increased by 37.6% year on year” in August, so relief is a relative term. 

But diesel prices – key to manufacturing – are still outpacing petrol prices, partly because of demand globally for diesel byproducts, notably in Europe, which is turning to alternatives to Russian gas. 

Producer diesel price inflation in South Africa in the year to August was 58% versus 44.4% for petrol. 

Visit Daily Maverick’s home page for more news, analysis and investigations

“With the energy crisis in Europe and gas being throttled, Europe needs alternatives, and so there is an increased demand for diesel. In South Africa, Eskom is guzzling a lot of diesel and that is going to keep demand higher… 

“Base effects will start kicking in from next year, but for the next few months diesel prices will keep PPI higher for longer,” Jee-A van der Linde, an economist at Oxford Economics Africa, told Business Maverick. 

Meanwhile, producer food inflation remains elevated at 15.4%. On the consumer front, the food and non-alcoholic beverages component of CPI raced to 11.3% in August from 9.7% in July, despite easing global foodstuff prices. 

This remains a huge social concern against the backdrop of abject poverty and widespread hunger in South Africa.

Peak inflation at such high levels will not stay the hand of the South African Reserve Bank, which has hiked its key repo rate by 275 basis points since November last year to contain inflation and keep pace with major central banks. More rate hikes have been expected, and SA Reserve Bank governor Lesetja Kganyago said this week that the “nice period” was at an end. 

“Just over a decade ago, it was common to talk about a Great Moderation in global macroeconomic conditions. Mervyn King, a former Bank of England governor, called it the NICE period: Non-Inflationary, Consistently Expansionary. Today, it would be more appropriate to talk about VICE: a Volatile, Inflationary and Contractionary Economy,” Kganyago said in a speech to the Centre for Education in Economics in Johannesburg this week. 

The central bank itself is caught in the vice of a South African economy that may be tipping into recession, thanks to industrial-scale load shedding, but still has price pressures in the pipeline, even if they are starting to ebb. 

The central bank’s mandated target range for consumer inflation is 3% to 6%, and the governor said that a 3% target would make inflation “less of a concern in the everyday lives of South Africans”.

That is food for thought. But with CPI still outside the current target range, PPI running at over 16%, and the rand looking wonky, expect rates to keep going north. DM/BM