In September, producer prices fell by 4.0% month-on-month (m-o-m), resulting in annual producer price inflation decreasing by a noteworthy 0.9 %pts to 4.2% year-on-year (y-o-y). Given that markets expected a slight uptick to 5.4% y-o-y (from 5.1% y-o-y in August), the latest print comes as somewhat of a surprise.
The main contributors to the monthly decline were the electricity (-4.9 %pts) and basic metals (-0.3 %pts) categories. Falling prices in these categories were countered to some extent by price increases in the mining and quarrying sector, which contributed 0.4 %pts to the monthly figure, as well as rising prices for agriculture, manufactured food products and products of petroleum and coal, each adding 0.2 %pts. Turning to the annual figure, positive contributions originated in the electricity (+1.3 %pts), petroleum products (+0.7 %pts), manufactured food products (+0.6 %pts) and agriculture (+0.4 %pts) categories, while the basic metals category subtracted 0.3 %pts.
Over the month, electricity prices fell by 32.9% m-o-m. The strong contraction in prices reflects the seasonal component in annual electricity price adjustments (electricity prices fell by 32.6% m-o-m in September 2011). As such, annual inflation in the category only moderated slightly from 13.8% y-o-y in August to 13.3% y-o-y in September. 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.
Producer prices in the mining and quarrying sector increased by 2.1% m-o-m. Rising prices for metals (precious metals in particular) on the back of the labour strife in the domestic mining sector saw producer prices in the category increase by 4.1% m-o-m, while elevated prices for oil translated into an increase of 2.3% m-o-m in the crude oil and gas category. Despite the relatively strong monthly figure, annual inflation in the mining and quarrying sector fell to -0.1% y-o-y in September from 1.7% y-o-y in August.
Turning to manufacturing, prices for manufactured food products and products of petroleum and coal increased by 2.8% m-o-m and 3.0% m-o-m respectively. Surging grain prices during mid-2012 are starting to filter through to output prices for manufactured food products, as is reflected in two consecutive sharp monthly increases in the category. Prices in the petroleum products category rose over the month on the back of a 93c/litre increase in the domestic price of petrol, as well as a significant rise in the price of diesel, in September. The international price of oil has declined somewhat in recent weeks and might provide for a moderation in inflation in the category going forward. However, continued exchange rate weakness on the back of adverse domestic developments may limit any downside pressure emanating from lower international prices. On the downside, basic metal prices fell by 4.1% m-o-m (-3.2% y-o-y) in September, possibly on the back of weaker demand due to the struggling global economy.
After falling by 1.0% m-o-m in August, the PPI for imported commodities rose by 3.7% m-o-m in September, fully accounted for by rising import prices in the mining and quarrying sector (+10.0% m-o-m). As a result, annual inflation accelerated sharply to 9.4% y-o-y from 4.4% y-o-y in August. The PPI for exported commodities rose by 1.0% m-o-m.
Producer price inflation is expected to remain subdued in coming months as soft global demand is projected to weigh on certain commodities. However, elevated food and oil prices, combined with the weak Rand exchange rate, continue to pose an upside risk to the outlook.