In August 2011, SA Producer Price Inflation (PPI) rose by a substantial 1.0%m/m, with the annual rate of change moving higher to 9.6%y/y from 8.9%y/y in July and 7.4%y/y in June 2011. The increase in PPI inflation was above market expectations, which was for the annual rate to rise to 9.1%y/y (Bloomberg). The higher than expected monthly increase was mainly due to a further jump in mining and agricultural prices. During the first eight months of 2011, PPI inflation has averaged 7.4%, compared with 5.9% in 2010 and a mere 1.2% in 2009.
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.
Mining inflation rose by a further 2.6%m/m in August, with the annual rate up at 12.3%y/y. The August increase was fairly broad-based and included fairly large increases in coal, petroleum, metal and other mineral prices. The increase in mining inflation contributed 0.5 percentage points to the monthly rise in PPI.
There was also a substantial increase in agricultural prices, which rose by 2.1% during the month and by 7.2%y/y. This is the highest level of agricultural inflation since January 2009 and contributed 0.1 of a percentage point to the monthly rise in PPI. Manufactured food inflation also rose further during August, jumping 0.8%m/m and 7.2%y/y.
Overall, while PPI inflation benefited from the relative strength of the Rand in 2010 and early 2011, the strong rise in utility (electricity) inflation coupled with still high energy and commodity price inflation and the recent Rand weakness 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.
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