In May 2010, SA Producer Inflation (PPI) rose by a modest 0.2%m/m, with the annual rate of change moving up to 6.8%y/y from 5.5%y/y in April 2010. The monthly rise was well below market expectations, which was for an increase of around 0.5%y/y. The annual rate of change is being hurt by the low base that was established in mid-2009.
The modest 0.2%m/m rise in PPI during May 2010 was helped by another sharp decline in agricultural prices (-2.8%m/m), which subtracted 0.2 percentage points from the monthly change in PPI. In terms of what went up; paper, basic metals, and electricity prices all added 0.1 of a percentage point to the monthly change in PPI.
The new definition and measure of PPI, which was introduced in 2008, does imply increased volatility month-by-month given the inclusion of many more commodity prices changes, which are significant in weight. Unfortunately, because of this the new PPI also has less direct relevance and bearing on the consumer inflation rate.
As mentioned above, during May agricultural food prices fell by 2.8%y/y, with the food component of the agricultural price index down a significant 7.5%m/m (flower prices rose sharply in the month). The annual rate of change in agricultural food inflation is now -4.9%y/y. Manufactured food inflation rose by a modest 0.1%m/m in May, and is still down 1.3% relative to a year-ago. Clearly, agriculture and produce food inflation remain extremely subdued, which should help to keep consumer inflation well under control over the coming months. Consumer food inflation has moderated noticeably in the past six months to a mere 0.1%y/y currently.
PPI had been below 6% for 14 consecutive months, but given the low base established in mid-2009 PPI inflation is expected to continue to move higher during 2010, mostly due to base effects. In addition, the further significant rise in electricity prices, and higher wage demands represents a meaningful upward risk to producer inflation. However, given the still weakish domestic demand conditions (spare capacity), many companies will have to absorb some of these costs through margin compression.
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