PPI – inflation falls, 2017 should see subsidence of food price inflation

PPI inflation fell to 6.6% y/y in September from 7.2% y/y in August. The diesel price fell by 48c/litre in September, but in October a 23c/litre hike occurred. For November a 63c/litre hike is currently building on the higher oil price. We continue to expect the oil price to average around US$45/bbl this year.

The good news is that planting for a number of crops is likely to increase substantially next year on higher expected rainfalls, which should moderate food price inflation, and so help to reduce CPI and PPI inflation. Lower inflation prints, particularly consistently tending (and expected to tend towards) towards 5.0%, will likely end the upward interest rate cycle in SA.

Agbiz says “the data shows an expected 15% year-on-year (y/y) increase in summer crops hectares, from 3.27 million hectares in 2015/16 production season to 3.75 million hectares in 2016/17 season.” “Maize, soybeans and groundnuts are set to show a recovery.”

Agbiz adds “yellow and white maize plantings could increase by 43% y/y and 8% y/y to 1.46 million and 1.01 million hectares, respectively. The expected significant jump in white maize area is largely on the back of favourable market prices, relative to yellow maize prices. Groundnuts area could increase by 48% y/y to 33 500 hectares, owing to favourable market prices and expected improvement in weather conditions.”

“Also worth noting is that South Africa’s third wheat production estimate was revised up 2% from the previous estimate to 1.73 million tons, owing to expected higher yields on the back of favourable weather conditions. Moreover, this is 20% higher than the previous season’s crop of 1.44 million tons.”