Producer inflation dips to 8% with further easing likely

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Wiseman Khuzwayo

INFLATION for final manufactured goods eased to 8 percent last month from 8.1 percent in June and is expected to continue declining in the coming months.

This was marginally higher than the 7.9 percent consensus forecast of economists polled by Reuters. With the consumer price index (CPI) inflation having slowed to 6.3 percent in July from 6.6 percent in June, this has led to expectations that the Reserve Bank’s monetary policy committee (MPC) will not hike interest rates at its meeting next month, although it has consistently repeated that it is in a rate-increasing cycle.

The Reserve Bank has already raised interest rates by 75 basis points since the beginning of the year.

Statistics SA said yesterday that the producer price index (PPI) for final manufactured goods increased by 0.5 percent month on month in July, up from a monthly 0.3 percent in June, driven by food, beverages and tobacco products.

The annual rise in the PPI for electricity and water eased to 7.8 percent from 8.2 percent in June. In mining, the annual rate climbed to 7.8 percent from 5.8 percent in June.

Annabel Bishop, the chief economist at Investec, said that the producer inflation rate was likely to fall further this year as food price inflation at the agricultural level continued to drop, the rand oil price moderated and demand price pressures were muted.

She said a declining trend in CPI inflation for the remainder of this year and probably the first half of next year due to lags involved with agricultural commodity prices, and a return within the inflation target by year-end, meant the Reserve Bank need not hike interest rates again this year.

Nedbank said it expected producer inflation to continue easing in the coming months, although at a modest pace, as global food and energy prices moderated, adding that the inflation outlook remained poor in the short term.

Nedbank said the economy avoided another contraction in the second quarter, helped mainly by expansion in the services sectors, but output in both mining and manufacturing had declined further.

“Despite this weakness, we still expect the Reserve Bank to continue on its path of moderate tightening, hiking by another 0.25 percentage points in November. This, however, will depend on the movement of the rand,” the bank said.

Azar Jammine, a director and chief economist at Econometrix, said he suspected that the declining intensity of producer inflation was being driven by the stabilisation of the rand since its steep depreciation in December and January.

He said in addition, declining commodity prices, especially of oil and petroleum products, but also to some extent food, made an important contribution towards the decline in producer inflation rates. These influences were likely to drag the producer inflation rate down further in coming months.

Jammine said: “Given that news has emerged of extremely weak real economic activity, the evidence pointing to declining producer inflation will simply reinforce the dilemma which the Reserve Bank faces in promising to go through with raising interest rates.”


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