In October 2011, SA Producer Inflation (PPI) fell by 0.3%m/m, although the annual rate of change rose marginally to 10.6%y/y from 10.5%y/y in September. The annual increase in PPI inflation was below market expectations, which was for a rise to 11.0%y/y (Bloomberg).
The lower than expected monthly change in PPI was mainly due to a further seasonal decline in electricity prices, although agricultural prices rose by a further 3.4%m/m to 12.9%y/y.
During the first ten months of 2011, PPI inflation has averaged 8.0%. This compares with 6.0% for calendar 2010 and a mere 0.2% for calender 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.
As mentioned above, there was a substantial increase in agricultural prices during October, up 3.4%m/m. The monthly rise was relatively broad-based and included a sharp jump in the price of vegetables, grains, fruit, oil seeds, and live animals. On an annual basis agricultural inflation is now up at 12.9%y/y, which is the highest since March 2008. Agricultural prices contributed 0.3 percentage points to the monthly change in PPI. Manufactured food inflation also rose further during October, increasing 0.4%m/m and 9.0%y/y.
The rise in agricultural inflation will tend to feed into higher consumer food inflation over the coming months, aggravated by the current Rand weakness. These monthly increases were more than offset by a seasonal 6.9%m/m decline in electricity prices. This reflects the conversion back from winter to summer electricity tariffs. The decline in electricity inflation subtracted 0.7 percentage points from the monthly change in PPI; resulting in PPI falling month-on-month.
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 (including food agricultural inflation) 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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