In July 2011, SA Producer Price Inflation (PPI) rose by a substantial 2.7%m/m, with the annual rate of change moving higher to 8.9%y/y, from 7.4%y/y in June and 6.9%y/y in May 2011. The increase in PPI inflation was above market expectations, which was for the annual rate to rise to 7.7%y/y (Bloomberg).
The higher than expected monthly increase was mainly due to a further jump in electricity prices, which rose by 15.0%m/m, as well as a fairly significant increase in commodity prices. During the first seven months of 2011, PPI inflation has averaged 7.0%, compared with 6.0% in 2010 and a mere 0.2% in 2009.
Electricity inflation rose by a further 15%m/m in July with the annual rate easing fractionally to 25.1%y/y from 27.6%y/y June, and 26.1%y/y in May. Electricity prices rise substantially in June and July every year as part of the seasonal adjustment in pricing; although there has been a general tendency for analysts to underestimate this seasonal (winter) effect over the past few years. The monthly increase in electricity inflation added 1.9 percentage points to the monthly change in PPI, and was clearly the dominant factor impacting the PPI inflation rate during the month.
Mining inflation rose by a significant 2.0%m/m in July, adding 0.4 of a percentage point to the monthly change in PPI. The monthly rise was relatively broad-based, with all the major sub-components of mining inflation rising during the month. On an annual basis, mining inflation is up at 11.8%y/y.
There was also some further upward pressure on agricultural prices (rising 1.9%m/m). Overall, SA agricultural and manufactured food inflation remains relatively well contained (see chart attached) given the dramatic increase in global food prices over the past year. There are a number of reasons for this, including the relative strength of the Rand, operating margin compression at the producer level and weak consumer activity that makes it more difficult to pass-on large price increases. Fortunately, international food prices has eased a little in recent months.
Overall, while PPI inflation has benefited from the relative strength of the Rand, the strong rise in utility (electricity) inflation coupled with still high energy and commodity price inflation is keeping the overall rate of producer inflation relatively high.
Clearly, the high PPI reading worsens the outlook for consumer inflation, although the relationship between PPI inflation and CPI has diminished since the new PPI was introduced in 2008. The new definition and measure of PPI implies increased volatility month-by-month, given the inclusion of many more commodity prices changes, which are significant in weight.
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