Experts expect June producer price inflation to have slowed

In a quiet week on the economic front, the highlight will be the release of the latest data on producer price inflation and SA’s trade balance.

In line with the recent slowdown in consumer inflation, most economists expect producer price inflation to have moderated slightly in June. However, the data may reflect price pressures due to Covid-19-related supply chain difficulties that could be worsened by the recent unrest.

The producer price index (PPI) for June will be published by Stats SA on Thursday. The Bloomberg consensus expectation is for it to slow to 7.3% year on year from 7.4% year on year in May.

Producer prices jumped in May from 6.7% year on year in April mainly because of the pandemic-induced low base created when oil prices crashed this time in 2020. Excluding petroleum-related products, annual producer inflation held steady at 5.5% in March, April and May.

First National Bank (FNB) chief economist Mamello Matikinca-Ngwenya expects producer inflation to trend steadily lower from June, reaching 4.9% towards the end of the year, and averaging at most 5.3% for the year as a whole.

“We see upside risk to [producer] inflation emanating from possible rand weakness, shipping costs and a global shortage of raw materials such as semiconductors,” she says. “However, inflationary pressure from these risk factors should partially be countered by reduced capacity and weak domestic demand.”

BNP Paribas economist Jeffrey Schultz expects the PPI to have slowed to 7.2% year on year in June (an increase of 0.3% month on month) but warns that persistent supply chain difficulties, which may be temporarily worsened by the recent unrest, could put upward pressure on producer prices.

So far the Reserve Bank has remained sanguine. At the monetary policy committee (MPC) meeting last week, it revised its consumer price inflation forecast for 2021 only slightly higher to 4.3% (up from 4.2%), and its 2022 outlook lower to 4.2% (from 4.4%). For 2023 it remains at 4.5%.

Though the Bank believes the risks to the short-term inflation outlook are to the upside, the MPC again voted unanimously to leave the repo rate unchanged at 3.50%.

Private sector credit extension (PSCE) for June will also be published on Thursday.

PSCE remained in negative territory in May, falling 0.4% year on year after April’s deep 1.8% year on year contraction.

The decline was mainly due to corporate credit, which contracted 5.0% year on year, after a sharp 6.7% year-on-year decline in April. In contrast, household credit extension continued its upward trend, growing by a robust 5.6% year on year from 4.7% year on year the previous month.

As base effects wane, FNB expects corporate credit extension to improve, allowing overall PSCE to move towards positive territory.

Trade data will be published on Friday, with some economists expecting an even bigger trade surplus than the R54.6bn recorded in May. This was SA’s widest monthly trade surplus since January 2010.

Schultz is banking on SA’s elevated terms of trade and weak import demand to have pushed the trade balance to a high of R58.6bn in June.

Thanks to the surge in SA’s terms of trade, which has risen by almost 12% over the past year and by more than 20% since the end of 2018, the accumulated trade surplus topped more than R202bn between January and May compared to just R10.6bn over the same period in 2020.