In September 2011, SA Producer Price Inflation (PPI) fell by 3.3%m/m, but the annual rate of change rose to 10.4%y/y from 9.6%y/y in August. The annual increase in PPI inflation was slightly above market expectations, which was for a rise to 10.4%y/y (Bloomberg).
The higher than expected monthly increase was mainly due to a further jump in mining and agricultural prices. During the first nine months of 2011, PPI inflation has averaged 7.7%, compared with 6.0% in 2010 and a mere 0.7% in 2009.
The new definition and measure of PPI, which was introduced in 2008, implies an 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 3.9%m/m in September, with the annual rate up at 17.7%y/y. The September increase was fairly broad-based and included fairly large increases in coal, petroleum, metal and other mineral prices. The increase in mining inflation contributed 0.8 percentage points to the monthly rise in PPI.
There was also a substantial increase in agricultural prices, which rose by 1.9% during the month and by 10.7%y/y. This is the highest level of agricultural inflation since early 2008 and contributed 0.1 of a percentage point to the monthly rise in PPI. Manufactured food inflation also rose further during September, jumping 1.7%m/m and 8.8%y/y.
These monthly increases were more than offset by a seasonal 32.6%m/m decline in electricity prices. This reflects the conversion back from winter to summer electricity tariffs. The decline in electricity inflation subtracted 4.5 percentage points from the monthly change in PPI.
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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