Nedbank: Producer inflation

27 Aug.

Nedbank Economic Commentary: Producer price inflation.

Producer inflation picks up further.

• Producer inflation in July came out slightly ahead of our expectations of 8,5% y-o-y, rising to 8,9% from 7,4% in June. Electricity, agriculture and other commodity prices remain the main drivers of producer inflation.
• Over the month, prices rose by 2,7%, mainly due to the increase in electricity prices as well as gas and water. The mining and quarrying category, agriculture as well as metal products and machinery also contributed towards the monthly increase.
• Producer inflation is expected to edge up over the coming months, but lower commodity prices and subdued global growth are expected to put downward pressure on prices next year.
• Both producer and consumer inflation are expected to move higher during the remainder of the year and into early 2012, but this trend should reverse as the year progresses. As a result, the Reserve Bank is unlikely to react to a short-term breach of the inflation target. Rather the Bank will carefully watch for signs that the global economy is slipping into recession and how the domestic economy is fairing. With growth under threat, the MPC will probably opt to keep rates on hold. Should the global economy slip back into recession a cut in rates may be on the cards. However, for now, we maintain our view of unchanged rates until May 2012.

Comment

Producer inflation gained further momentum, rising to 8,9% y-o-y in July, up from 7,4% in June. This was well ahead of market expectations of an increase to 7,9%. Over the month, prices rose by 2,7%, largely due to higher electricity prices as well as an increase in the cost of gas and water. Food prices at the agricultural level rose by 0,9% m-o-m, taking the annual increase to 5%. Over the month, the largest price increases came from fruit (up 5,4% m-o-m) and grain (up 2,7% m-o-m). Manufactured food prices were unchanged over the month, as increases in the price of meat, fruit and sugar, were offset by lower prices of grain, fish as well as fats and oil. Food inflation at the manufactured level increased to 6,3% y-o-y, but still remains below that of food inflation at the consumer level. …

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