Nedbank: Producer inflation

23 Feb.

Nedbank Economic Commentary: Producer inflation.

Producer inflation came out lower than expected in January.

• Producer inflation declined to 8,9% y-o-y in January from 9,8% in December, against consensus forecasts of 9,5%.
• Over the month, producer prices rose by 0,3% following no change in December, mainly driven by a 0,6% rise in prices at manufacturing level, with food prices in particular rising by 0,7%. This was, however, partly contained by agricultural prices, which fell by 4,3% over the month, with food at the agricultural level dropping by 5% following a 2,3% increase in December.
• On an annual basis, agricultural and manufacturing prices were up by 7,9% and 7,6% respectively. Mining and quarrying prices rose by 7,7% y-o-y in January, while basic metals and metal products were up by 5,4% y-o-y and 11,4% respectively.
• Weaker demand conditions, both locally and globally, are likely to contain producer inflation during the year. However, upside risks remain due to potentially higher food and oil prices as well as a weaker rand.
• Lower-than-expected producer inflation for January is good news. However, consumer inflation remained high and above the upper end of the Reserve Bank’s target range during the same month. The Monetary Policy Committee (MPC) will continue to face the challenge of striking the right balance between supporting a fragile economy and preventing stubbornly high inflation. We expect the committee to maintain its accommodative stance, keeping interest rates on hold until around November this year.

Comment

Producer inflation eased further in January, with slower than expected increase in prices over the month mainly attributed to a drop in prices agricultural products (down by 4,3%). Agricultural prices were dragged down by food prices, which fell on the back of sharp declines vegetables (down by 13,5 m-o-m) and fruits and nuts (down by 6,6%) prices. Adding upward pressure to producer prices were manufactured goods, which rose by 0,6% over the month, with food at manufacturing level up by 0,7% due to higher prices of fats and oils (up by 3,6% m-o-m).

On an annual basis, prices of both agricultural and manufactured products remained elevated at 7,9% and 7,6% respectively although they moderated from 11,8% and 7,7% in December. Prices of mining and quarrying products were 7,7% higher in January compared with the same month last year, mainly due to a 25% rise in prices of crude oil and natural gas products.

Prices of base metals and metal products rose by 5,4% and 11,4% respectively over the year, while those of coal and lignite were down by 2,1%. Prices of chemicals and chemical products increased by 6,8% y-o-y, while those of transport and related products remained subdued, falling by 0,4% y-o-y following a 0,7% decline in December. …

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