The producer price index (PPI) again posted a higher than expected increase of 6.6% year-on-year (y/y) – now at this level for three consecutive months. The BER and market consensus expected producer inflation to dip below 6% in June. Producer inflation rose by 4.4% in month-on-month (i.e. compared to May) terms.
The main reason for the surprising stickiness of producer inflation was a higher than expected increase in electricity tariffs. The PPI electricity component jumped 52.3% m/m (implying a slight moderation in y/y terms to 19.6%) and contributed 5 percentage points (%pts) to the m/m increase in producer inflation. The June PPI traditionally captures the seasonal increase in electricity tariffs, with further increases following in July. Since 2010, June increases in the PPI electricity component have been large relative to historic trends and smaller increases were recorded for July (see Table 1).
Given that Eskom’s approved increase for the 2012/13 financial year was adjusted down to 16% (from 25.9%), it was expected that there would be a larger moderation in the increase captured in the June PPI. The implication is that the July rise in the electricity component may be relatively subdued and/or the seasonal decline in September might surprise on the upside.
On the other hand, the producer price indices for both the manufacturing and primary industries declined on a m/m basis. The largest negative contribution (-0.3 %pts) to the overall PPI came from the index for products of petroleum and coal which declined by 4.6% m/m. This is in line with the fall in domestic petrol (55c/litre) and diesel (24.8c/litre) prices as well as the drop in international oil prices during the month – which is also reflected in the decline of 5.6% m/m in the crude petroleum and natural gas index. Coupled with a 2% m/m decline in the coal and lignite index, this implied that the mining and quarrying component subtracted 0.2 %pts from the overall PPI.
Food price inflation at manufacturing level continued to moderate in y/y terms, dropping from 8.4% to 7.7% on the back of another limited m/m rise of 0.2%. Furthermore, food inflation at the agricultural level again declined by 1.4% m/m. However, the grain component of the agricultural food index posted another sizable (4.3% m/m) increase during the month with the y/y rate soaring from 8.9% to 15.9%. Domestic wheat prices rose 5.8% during the month, backed by international trends due to supply concerns as a result of unfavourable weather patterns in particularly the US.
Overall, the PPI for manufacturing fell 0.1% m/m (dropping to 4.4% y/y) and the PPI for primary industries declined 0.7% m/m (5.6% y/y).
Outlook
Stats SA put out a media statement earlier this week in which it was confirmed that the changes to the PPI will only take effect from the January 2013 and not with the July 2012 release as anticipated earlier. The crux of the changes is that, in line with international standards, the headline PPI will be constructed from prices of final manufactured products only. The comparable current measure is the PPI for manufacturing which moderated during June.
The fact that the new headline PPI will now only be introduced in 2013 does not currently alter the BER’s PPI inflation forecast notably. Despite the higher than expected PPI figures in both May and June, the BER remains comfortable with the view that PPI inflation is likely to moderate notably in the second half of the year on the back of base effects and limited upward pressure from international commodity prices.