Nedbank: Producer inflation

28 Jul.

Nedbank Economic Commentary: Producer inflation.

Producer inflation picks up further.

• Producer inflation rose ahead of market expectations to 7,4% y-o-y in June, up from 6,9% y-o-y in May.
• The introduction of the winter electricity tariff was mainly responsible for the 4,4% m-o-m increase in producer prices. Agricultural food prices fell over month (3,3%), while the mining and quarrying category was up by 0,6% m-o-m.
• On an annual basis, the main drivers of producer inflation remained electricity (up 25,5% y-o-y), petrol (up 21,1% y-o-y) as well as chemicals and chemical products.
• 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.
• The MPC will face a difficult dilemma over the coming months – how to react to rising inflation in an environment where growth is both weak and fragile. While there are already calls for the Reserve Bank to start hiking interest rates, in response to the anticipated breach of the inflation target by the end of the year. We still believe that hiking rates too soon, would do more harm than good. As a result, we still hold the view that interest rates will remain unchanged until the first quarter of next year.

Comment

Producer prices rose more than market expectations, increasing to 7,4% y-o-y from 6,9% y-oy in May.

Food prices at the agricultural level fell by 3,3% m-o-m, due to declines in the prices of fruit, as well as grains and vegetables. Over the year, prices rose by 4,3%, down sharply from the 8,9% annual growth recorded last month. At the manufacturing level food prices rose by 0,9% m-o-m and 5,9% y-o-y, up from 4,8% y-o-y.

The year-on-year increase in the mining and quarrying category picked up, rising to 7,1% from 4,1% in May. The mining and quarrying category recorded a 0,6% m-o-m increase due to higher prices of coal and ‘other’ minerals.

Inflation in the manufacturing category eased slightly to 4,5% from 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 remained elevated at 25,5% y-o-y.

See the full Commentary