Nedbank: Producer inflation

30 Jun.

Nedbank Economic Commentary: Producer inflation.

Producer inflation picks up modestly.

• Producer price inflation picked up modestly to 6,9% y-o-y, only slightly below our forecast of 7% y-o-y from 6,6% y-o-y in April.
• Higher agricultural prices over the month (particularly vegetables, grain and other foods) as well as oil prices were the main contributors to the monthly increase. Other commodity prices fell over the month, as lower commodity prices globally, filtered through to the domestic economy.
• On an annual basis, the main drivers of producer inflation remain electricity (up 23,5% yo- y), petrol (up 20,5% y-o-y) and food at the agricultural level (up 8,9% y-o-y)
• Commodity prices have corrected 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. 
• Comments by Governor Marcus earlier today that the “recovery is becoming more sustained”, suggest that the Reserve Bank is more confident about the state of the domestic economy. However, we still believe that there is not sufficient evidence that stronger growth is resulting in demand-side pressures on 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 prices rose slightly more than market expectations, increasing to 6,9% y-o-y from 6,6% y-o-y in April.

Food prices at the agricultural level rose by 3,4% m-o-m, due to rises in the prices of fruit, oil seeds, ‘other’ foods as well as grains and vegetables. Over the year, prices rose by 8,9%. At the manufacturing level food prices rose by 1,4% m-o-m and 4,8% y-o-y.

The year-on-year increase in the mining and quarrying category moderated further, easing to 4,1% from 4,8% in March. The mining and quarrying category recorded a 0,4% m-o-m decline due to falling prices for coal and lignite (down 0,8% m-o-m), metal ores (down 0,8% m-o-m) as well as crude petroleum and natural gas.

Inflation in the manufacturing category remained unchanged at 5,7% y-o-y. 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