In June 2011, SA Producer Inflation (PPI) rose by a substantial 4.4%m/m, with the annual rate of change moving higher to 7.4%y/y from 6.9%y/y in May 2011. The increase in PPI inflation was above market expectations, which was for the annual rate to remain unchanged at 6.9%y/y (Bloomberg).
For 2010 as a whole SA PPI inflation averaged 6.0% compared with 0.2% in 2009.
The higher than expected monthly increase was mainly due to the seasonal jump in electricity prices, which rose by 53.4%m/m in June (this is part of the seasonal or winter price adjustment), with the annual rate rising to 27.6%y/y, from 26.1%y/y in May. This was higher than the market expected, although there has been a general tendency over the past few years to underestimate the seasonal (winter) increase in electricity prices. This monthly increase in electricity inflation added 4.5 percentage points to the monthly change in PPI, and was clearly the dominant factor impacting the PPI inflation rate during the month.
Agricultural prices fell by a welcome 1.2%m/m in June, subtracting 0.1 of a percentage point from the monthly change in PPI. On an annual basis, agricultural inflation is up at 5.1%y/y compared with 4.8%y/y in May. Overall, though, SA agricultural and manufactured food inflation remains very well contained 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.
Other notable changes during the month included a welcome decline in petroleum prices, at both the crude and refinery level, which was more than offset by a rise coal and other mineral prices as well as manufactured food prices. It is also interesting to see that SA manufacturing inflation has now eased to 4.5%y/y, despite the high increase in wage demands.
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 clearly keeping the overall rate of producer inflation relatively high.
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.
Download the presentation slides