PPI increased 14.7% y/y in May

‘We’re probably going to get more interest-rate hikes from the US and the Reserve Bank now and perhaps towards the end of the year into next year’: Annabel Bishop – group chief economist, Investec.

FIFI PETERS: We’re talking about inflation. I’m beginning to sound like a broken record because every other conversation we have lately is around inflation. But it is because the living costs and rising living costs have been a major theme throughout this year, and will probably be a major theme for the rest of 2022. Today we got to see the kind of cost pressures that are facing producers in the various sectors of the South African economy – from food and clothing manufacturers to people and producers that make cars, as well as those in other big industries.

The latest inflation numbers for producers came in at 14.7% in the month of May, which was quite a big jump from April’s producer price inflation, PPI, figure and also a lot higher than most economists had expected.

To help us break down these numbers is Annabel Bishop, the group chief economist at Investec. Annabel, thanks so much for your time. Always a pleasure. I see that the consensus forecast – most economists were expecting PPI to come in at 14% in May – is coming slightly higher. So where was the surprise?

ANNABEL BISHOP: Hi, Fifi. I think overall there are quite broad-based cost pressures. But one thing which really stood out was that the diesel price’s inflation is over 50% year on year – and of course coke and petroleum costs. It’s interesting that that includes all your energy costs, so will include coke, petroleum, oil, etc. That is over 40% year on year.

So I think when you get to a 14%, 14.7% inflation figure, it’s quite close. We are not looking at a difference between 4% and 4.5% here, and I think this is really the point. I had a look at that inflation figure today. On that 14.7%, 7.7% is your fuel energy cost that they’re talking about. So the remainder, half, is all your other components. So it’s really a function where inflation in South Africa……2:21 is being driven particularly by fuel costs, but also of course by food. And of course, going into July now we’ve got further petrol and diesel price hikes, and electricity price hikes as well. So continued upward cost pressures.

FIFI PETERS: Often we talk about the state or financial health of the consumer. Just given the current environment things are really tough. But how would you rate then the financial health of producers or corporates who are facing these much higher costs right now?

ANNABEL BISHOP: To be honest, Fifi, I think they are struggling because passing the costs directly on to consumers obviously has a negative impact on sales. Of course it’s a situation where consumers themselves are battling, not just from higher inflation taking money out of their expenditure ability in real terms, but also from higher interest rates that cut into disposable income as well. So I think from a producer point of view they are going to have to pass the costs on, and this is going to become increasingly the case as we move through the year.

Interestingly, I was looking at food-price inflation as well. It’s on the agricultural level running close to 20%, and this really talks to further cost pressures in food price inflation coming through down the line. I had a look historically. We haven’t escaped very high agricultural production costs persisting through into your processed and unprocessed foods at the CPI [consumer price inflation] level.

I think overall my expectation was that in the third quarter we are going to see consumer price inflation exceed 7%. It might even top that, it might be near 8%, but it’s going to make it a difficult environment for producers. And of course, even if you look at farmers themselves having a slew of costs coming through, including higher fertiliser costs as well as the electricity and water costs.

So I think there are going to be perhaps greater cost pressures coming through in the second half of the year than may well have been expected.

FIFI PETERS: What’s interesting – I was reading your analysis of the PPI numbers – is the fact that we’ve got a really good maize crop coming on this year; I believe it’s not too shabby, it’s quite good. But because we’re so influenced by what global food prices, global wheat prices and the like, are doing, we might not get the full benefits of having a bumper maize crop.

ANNABEL BISHOP: Well, that’s it. What it does for South Africa is it gives us food security. So we are not going to have insufficient supplies, if you see what I mean. In fact overall we have fairly good food security produced, most of the agricultural goods we need. But, as you quite rightly said, our commodity prices, the production of maize, they call it corn overseas, and wheat, even large cattle ……5:20 etc – are determined by both import- and export-parity pricing, by what’s largely prevailing in global markets.

Of course if we have a look at global markets we can see that we are tending to see very high commodity prices for energy and for food. Of course, metals and minerals are quite a bit lower – excluding coal. So it doesn’t really help us in terms of our trade balance either.

But coming back to South Africa’s pressures, we do obviously now expect to see the production cost price pressures coming in more as well. That of course is also going to push through possibly higher food-price inflation than expected in the second half of this year, as I said. And we think that it could actually near double digits if we don’t start to get some relief. We don’t know how long the Russia/Ukraine war will persist, and of course Nato says it could be for many years, which is a terrible thought.

But all of those [things] place further upward pressure on energy prices. I suppose if markets continue to factor in a greater trans-global recession, then we will continue to see weekly ……6:21 oil price that we have seen recently. But I think overall we are going to go into a much more difficult environment in the second half of this year, globally and domestically, for the economies.

FIFI PETERS: We do know that our Reserve Bank is really allergic to inflation. They hate it, like probably most of us hate – being around bees, bad example – but they hate it. I’m just wondering what you think they’re thinking right now, having seen this print coming in a lot higher, and whether the comments that the governor made earlier this week makes sense, that a 50 basis point interest-rate hike is what we should or could see next time around.

ANNABEL BISHOP: I think we probably will see it. We’re going to battle if we fall out of step with the United States. By that I mean they’re seeing substantially high interest rates. Of course they saw a 75 basis point hike. If South Africa doesn’t see significant increases in its interest rates going through this year, we’re going to see marked rand weakness, and of course that’s something which would feed through directly into our inflation through the petrol energy cost. That would, of course, compound the situation and make it significantly worse.

Very high inflation erodes purchasing power, it erodes incomes, it makes people’s lives more difficult, but also it has many other negative effects across the economy. I think our Reserve Bank, and of course those globally, will be looking to push through higher interest-rate hikes than expected a few months ago.

Maybe something to bear in mind, though, [is] they are probably front-loading them. We’re probably going to get more interest-rate hikes from the US and the Reserve Bank now and perhaps towards the end of the year into next year, because then we would see a greater impact on economic activities slowing. And of course in the United States they’re very worried about the very tight labour market, their very strong labour market passing through high salary and wage increases, of course – a wage spiral demand developing there.

So these are concerns which, I think, all central bank governors are going to be sharing.

FIFI PETERS: Annabel, we’re bracing ourselves for a rocky ride ahead still, but thanks so much for your time. Annabel Bishop is group chief economist at Investec.

I thought that this conversation was important for us to have, inasmuch as we are consumers and we do see the cost of everything that we are having to buy, and the cost of living and all that, going up. It is important to understand the perspective of business and producers and we can see that their costs are going up by double, sometimes even triple, the rate of ours as consumers. So just some perspective there.

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The interest rate hikes are too little too late.

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