Nedbank: Producer inflation

27 May.

Nedbank Economic Commentary: Producer inflation.

Lower commodity prices help ease producer inflation.

• Producer inflation eased to 6,6% in April from 7,3% in March, against market expectations of a decline to 7%.
• The larger-than-expected moderation in producer inflation was due to declines in the prices of fresh produce as well as lower prices for metal ores and coal.
• The year-on-year increase in the mining and quarrying category moderated sharply, easing to 4,6% from 8,1% in March. Inflation at the manufacturing level, eased slightly from 5,9% to 5,7%. In contrast, inflation in the electricity and gas category remains elevated at 23,1% y-o-y.
• Commodity prices have correctly slightly off earlier highs, which should help to contain producer inflation in the months ahead. However, base effects and the return of some pricing power to producers, should push prices at the manufacturing level up modestly over the months ahead.
• The sharp increase in commodity prices during late 2010 and early 2011 will continue to filter through into domestic inflation over the coming months – consumer inflation is expected to breach the upper band of the target in the final quarter of this year.
• Recent comments by the Reserve Bank suggest that the Bank will be reluctant to hike interest rates unless there is evidence of second-round inflation. With consumer demand relatively subdued and only modest credit growth, the risk of second-round inflation building any momentum seems modest. As a result, we expect the first hike in interest rates to come only in early 2012.

Comment

Producer inflation eased more than expected in April, slowing to 6,6% from 7,3%, due to some moderation in commodity prices.

Food prices at the agricultural level declined by 1,9% m-o-m, due to declines in the prices of fruit, oil seeds as well as ‘other’ foods. Over the year, prices declined by 2,6%, following a decline of 0,9% in March. At the manufacturing level food prices rose by 0,7% m-o-m and 3,4% y-o-y.

The year-on-year increase in the mining and quarrying category moderated sharply, easing to 4,8% from 8,1% in March. The mining and quarrying category recorded a 1,3% m-o-m decline, due to falling prices for coal and lignite (down 2,2% m-o-m) as well as metal ores (down 1,7% m-o-m). Inflation at the manufacturing level eased slightly from 5,9% to 5,7%. The main drivers of inflation within this category are basic metals and metal products as well as chemicals and products of petroleum and coal.

In contrast, inflation in the electricity and gas category remains elevated at 23,1% y-o-y.

See the full Commentary