PPI increase attributed to food, energy but rates to ‘remain stable’

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Producer price inflation (PPI) rose to 6.5 percent year on year last month versus 5.8 percent year on year in November, above the market consensus of a 6.2 percent annual rise.

Kamilla Kaplan, an Investec economist, said that assessing data over the fourth quarter of last year confirms that the food and energy components of the PPI basket had consistently been responsible for much of the upside price pressures.

A weakening momentum in the rand exerts upside pressure on PPI inflation. But “the extent to which price pressures will be passed along the supply chain to final prices for consumers may be tempered by weakening demand”.

Some producers have signalled intentions to raise prices to restore operating margins. But this came at the risk of a drop in sales volume, she said.

Busisiwe Radebe, an economist at Nedbank, said the weak currency and a possible rise in food prices, the largest category in PPI, posed the biggest risks to the outlook. Some upward pressure could be mitigated by moderation in the prices of certain commodities due to subdued global demand, but the general producer inflation bias is upwards for a few months.

Radebe said PPI numbers underlined upward price pressure in the economy and that the Reserve Bank’s decision to raise rates was not surprising, taking into account the deterioration in the currency and the risk of high inflation for an extended period. If the currency continues to deteriorate, then the bank’s move is the start of a long tightening cycle.

“The rand will remain under pressure in the short term, and we anticipate pullback in the second half of the year. The danger of another hike at the next monetary policy committee meetings is real, but rates will be stable for the rest of the year.” – Staff reporter

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