SA Producer Price Inflation October 2010

In October 2010, SA Producer Inflation (PPI) fell by 0.4%m/m, with the annual rate of change moving lower to 6.4%y/y from 6.8%y/y in September 2010 and a recent high of 9.4%y/y in June 2010. The moderation in PPI inflation was below market expectations, which was for no change in the month and for the annual rate to remain unchanged at 6.8%y/y. The monthly rate of change in PPI benefited, once again, from the switch in electricity tariffs from winter to summer pricing. Iron and steel prices also fell during the month.

During October 2010, electricity prices fell by a further 7.0%m/m, after declining 32.8%m/m in September 2010. This keeps the annual rate of change in electricity prices reasonably steady at 17.4%y/y (17.2%y/y in September 2010). The latest monthly decline in electricity tariffs relates, once again, to the normal seasonal switch in pricing from winter to summer months. The monthly reduction in electricity prices subtracted a significant 0.6% from the monthly change in PPI.

There was also a welcome decline in iron and steel prices (1.8%m/m). This subtracted 0.1% from the monthly change in PPI.

In contrast, agricultural inflation rose by 1.4%m/m, pushed higher by a fairly broad range of food categories including fruits and oil seeds. This added 0.1% to the monthly change in PPI. Overall, agricultural inflation remains very well contained at 0.1%y/y despite the sharp upward trend in international food prices. The strong Rand is clearly still helping to dissipate some of this international pressure, but obviously any sustained Rand weakness in 2011 would most likely quickly result in higher domestic food prices.

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 price 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.

The high electricity price (17.4%y/y) combined with higher wage demands (8%y/y) represent some upside risk to both producer and consumer inflation. However, given the still weak domestic demand conditions (spare capacity), and strong Rand (increased import competition) many companies are absorbing most of these higher costs through margin compression or labour attrition and therefore there is little sign of any general upward pressure on prices.