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Cape Town - The annual percentage change in the Producer Price Index (PPI) for final manufactured goods was 3.7% in March 2018 compared with 4.2% in February 2018, Statistics SA announced on Thursday.
From February 2018 to March 2018 the PPI for final manufactured goods decreased by 0.2%.
The main contributors to the annual rate of 3.7% were coke, petroleum, chemical, rubber and plastic products; transport equipment; and paper and printed products.
The main contributor to the monthly decrease of 0.2% was coke, petroleum, chemical, rubber and plastic products.
Nedbank's economic unit commented that this is lower than the expectated 4%.
Nedbank's economic unit said PPI is not expected to breach the SA Reserve Bank’s 6% upper target for CPI in the very near term, but should lift somewhat as the impact of the fuel taxes come into effect in April.
In the view of the unit, the increase in VAT should not have the same effect on PPI than it would on consumer inflation, so producer prices will remain relatively contained.
"The biggest risks to producer prices remain the rand, possible higher than expected food price increases and any major increase in fuel prices," the unit said in a statement.
"The better-than-expected inflation outcomes of recent months strengthen the case for accommodative monetary policy. The SARB’s latest consumer inflation forecast reflects a mild upward trend over the next three years. However, considerable upside risks remain."
The most significant of these, in Nedbank's view, are the threat of much higher electricity tariffs as part of the Eskom’s estimated R66bn clawback; higher food and fuel prices; and the rand’s continued vulnerability, particularly to changes in global investors’ risk appetite for emerging market assets.
Consequently, unit thinks SARB's Monetary Policy Committee (MPC) will probably leave policy rates unchanged for the rest of the year before embarking on a mild tightening cycle from around September 2019.
Although the declining PPI will help cushion the impact of a future increase in the headline Consumer Price Index (CPI), it is worrisome to producers, the Steel and Engineering Industries Federation of Southern Africa (Seifsa) said on Thursday.
Seifsa chief economist Michael Ade said the improvement in producer inflationary pressure was due to a stronger rand, which reduced the cost of inputs, and the subdued prices of both intermediary and retail products caused by lower demand.
Investec economist Lara Hodes commented that food price dynamics have been a key influencing factor on the moderation in PPI. Manufactured food price inflation peaked at 13.4% year-on-year (y/y) in August 2016 and has steadily declined, to -1.1% y/y in March 2018.
Hodes pointed out that CPI inflation fell below the midpoint of the inflation target in March, "however, this is likely to be the bottom of the current inflation cycle and price pressures will intensify in April".
"Furthermore, additional consumer taxes set out in the budget, which came into effect from the 1 April will heavily impact inflation for the twelve months, commencing from the second quarter of 2018 and so elevate the PPI outcome."
According to Lukman Otunuga, research analyst at FXTM, Thursday’s revelations that producer prices rose slower than expected last month could fuel speculation that SARB will cut interest rates further.
"Producer prices hit 3.7% y/y in March, slowing from a 4.2% gain in February as the price of food, beverages and tobacco eased. The consumer prices index fell to a seven year low in March at 3.8% which, coupled with that month’s PPI data, could support the case for an interest rate cut," he commented.
"The rand held its ground against the dollar following the release, with prices trading around R12.382/$. While the local currency could find support from the improving sentiment, gains are likely to be limited by a strengthening dollar."
Intermediate manufactured goods
The annual percentage change in the PPI for intermediate manufactured goods was -1.3% in March 2018 compared with 0.4% in February 2018. From February 2018 to March 2018 the PPI for intermediate manufactured goods decreased by 0.7%.
The main contributors to the annual rate of -1.3% were chemicals, rubber and plastic products; and basic and fabricated metals.
The main contributors to the monthly decrease of 0.7% were basic and fabricated metals; and chemicals, rubber and plastic products.
Electricity and water
The annual percentage change in the PPI for electricity and water was 3.5% in March 2018 compared with 3.5% in February 2018. From February 2018 to March 2018 the PPI for electricity and water decreased by 0.8%.
The contributors to the annual rate of 3.5% were water; and electricity. The main contributor to the monthly decrease of 0.8% was electricity.
Mining
The annual percentage change in the PPI for mining was -3.1% in March 2018 compared with -4,3% in February 2018. From February 2018 to March 2018 the PPI for mining decreased by 3.2%.
The main contributors to the annual rate of -3.1% were stone quarrying, clay and diamonds; and gold and other metal ores.
The main contributors to the monthly decrease of 3.2% were stone quarrying, clay and diamonds; and non-ferrous metal ores.
Agriculture, forestry and fishing
The annual percentage change in the PPI for agriculture, forestry and fishing was 3.9% in March 2018 compared with 5.7% in February 2018. From February 2018 to March 2018 the PPI for agriculture, forestry and fishing decreased by 4.5%.
The main contributor to the annual rate of 3.9% and the monthly decrease of 4.5% was agriculture.
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