Another inflation surprise: SA factory prices are far lower than expected | Fin24
 
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Another inflation surprise: SA factory prices are far lower than expected

Aug 29 2019 12:59

On Thursday, Statistics SA released the  producer price inflation for July - which at 4.9% was far lower than 5.8% in June and 6.4% in May.

It was also weaker than economists expected. Those who took part in a Bloomberg survey forecast PPI of 5.6% in July.

The PPI measures the prices that producers charge for final manufactured goods.

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While final food product prices rose by more than 6% in and clothing prices increased by 3.5%, prices of fuel products were lower than a year ago thanks to a slump in the global oil market, which enabled a petrol price cut in July.

In the mining sector, prices of outputs jumped. Gold PPI was up 41%, as the yellow metal trades at its highest level in six years. Investors across the world have embraced gold as uncertainty gathers about the market outlook. 

The latest number confirms that there is very little inflationary pressure in the limping South African economy, and could help support a rate-cut decision by the monetary policy committee, when it meets in September 17th.

July's consumer inflation number reached its lowest level in six months. Consumer price growth slowed to 4% from 4.5% in June. Economists  polled by Bloomberg expected 4.3%.

Little price pressure

Nedbank Group Economic Unit commented that there is very little price pressure in the economy given the weak economic growth that has been experienced so far in 2019. For this reason, consumer inflation has averaged 4.3% so far this year, lower than the midpoint of the SA Reserve Bank's 3% to 6% target range.

This is despite producer inflation averaging 5.5% over the same period and underscores the weakness of the South African consumer as retailers have not been able to pass on significant price increases, according to Nedbank. It expects inflation will remain relatively contained in the short to medium term.

The biggest upside risks to both consumer and producer inflation, however, are the rand and food prices. The rand is forecast to weaken over the medium term, on the back of expectations of a downgrade of SA's credit rating to subinvestment grade by rating agency Moody's, but the weakness is likely to be mitigated to some extent by expected looser monetary policy in developed economies, according to Nedbank.

With regards to food, a favourable grain crop is likely to cushion any price increases stemming from anticipated higher meat prices.
 
Nedbank foresees that SARB is likely to place more weight on future price changes before deciding on rates. For this reason, we anticipate that the SARB will take a wait and see approach leaving rates on hold for the remainder of the year given the uncertain trajectory of the rand," Nedbank commented.

Lara Hodes of Investec said a weak demand environment continues to hinder the transfer of costs further down the supply chain, with July’s CPI reading at just 4.0% y/y.
 
"At its July MPC meeting, the SARB assessed the risks to the inflation outlook to be 'largely balanced' but stressed that the rand remains an upside risk, vulnerable to global financial conditions and domestically to a possible credit rating downgrade," commented Hodes.
 
"Therefore, we feel that the SARB is likely to retain a cautious policy stance at its next MPC meeting, in view of the recent marked rand depreciation."
 

stats sa  |  ppi
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