Producer price inflation for July came out in line with market expectations at 1.6% month-on-month (m/m), resulting in the year-on-year (y/y) figure dropping sharply to 5.4% y/y after measuring 6.6% y/y for the previous three months ending in June.
The largest positive contribution to the month-on-month figure came from the electricity component, contributing 1.4 percentage points (%pts), while the agriculture and gas and water categories each added 0.2 %pts to the overall monthly figure. In contrast, mining and quarrying dragged down monthly inflation by 0.2 %pts. In terms of annual contributions, the categories of electricity (2.0 %pts), mining and quarrying (0.8 %pts), food at manufacturing (0.5 %pts) and products of petroleum and coal (0.4 %pts) accounted for 3.7 %pts of the year-on-year figure.
During July, electricity prices increased by 10.2% m/m, resulting in annual inflation in the category dropping to 14.5% y/y from 19.6% y/y in June. Year-on-year inflation is expected to continue to moderate in the coming months given the downwardly revised tariff increase granted to Eskom for 2012/13. Gas and water prices increased by 11.3% m/m. The strong monthly figure comes on the back of the annual survey conducted in July, and resulted in year-on-year inflation accelerating to 11.3% y/y from 7.8% y/y in June.
Worryingly, the latest producer price index (PPI) print suggests that the recent spike in the domestic price of maize and wheat futures on the back of adverse weather conditions in the United States’ Midwest and the Black Sea region is starting to impact on local food prices. Producer prices in the agriculture sector picked up by 2.7% m/m, driven by a strong increase in the food subcategory as a result of a 13.1% m/m jump in grain prices. Annual inflation in the food category more than doubled over the month – from 4.4% y/y in June to 9% y/y in July. With international prices projected to remain elevated in the short term, inflation in the category is expected to continue to accelerate towards the end of the year, posing an upside risk to consumer prices heading forward.
Producer prices in the mining and quarrying sector dropped by 0.9% m/m in July, driven mainly by a sharp fall in metal ore prices (-1.9% m/m) as the rand price of both platinum and gold came under pressure during the month. The fall in the price of metal ores was countered by a strong 4% m/m increase in the price of crude petroleum (and natural gas) on the back of rising international oil prices. The impact of rising oil prices can also be seen in the agriculture component, where producer prices in the oil seeds category increased by 7.9% m/m (38% y/y). On a year-on-year basis, producer inflation in the mining and quarrying sector dropped sharply to 3.8% y/y from 7.1% y/y in June.
Following an 85c/litre fall in the price of petrol in July, prices for manufactured petroleum and coal products declined by 1.5% m/m, resulting in the year-on-year figure moderating to 5.6% y/y (7.7% y/y in June). However, after falling by almost 12% m/m in June, the Rand price of Brent crude oil increased by 6.4% m/m during July, leading to a 22c/litre increase in the petrol price in August. Brent is currently trading at around $113/barrel on the back of rising tension in the Middle East and supply worries emanating from the North Sea, and another substantial petrol price hike is expected for September. As such, inflation in the petroleum products category is expected to accelerate substantially heading forward.
The PPI for imported commodities fell by 2.3% m/m, mainly as a result of a sharp monthly decline in import prices in the mining and quarrying sector (-6.2% m/m). As a result, year-on-year inflation dropped sharply to 6.6% y/y in July from 8.1% y/y in June. The PPI for exported commodities fell by 0.9% m/m, with the annual figure moderating to 0.9% y/y.
Producer price inflation is expected to moderate during the coming months, mainly due to base effects. However, upside risks abound as a result of the sharp rise in international commodity prices over recent months, specifically in the case of food and oil.