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The unexpectedly large surge in producer price inflation to almost 6% in June, mainly as a result of fuel price pressures, bodes ill for SA’s inflation trajectory and interest rate outlook.
The unexpectedly large surge in producer price inflation to almost 6% in June, mainly as a result of fuel price pressures, bodes ill for SA’s inflation trajectory and interest rate outlook.

Consecutive fuel hikes push June inflation to 5.9%

ECONOMIC NEWS

By Claire Bisseker - Jul 27th 2018, 08:39

The unexpectedly large surge in producer price inflation to almost 6% in June, mainly as a result of fuel price pressures, bodes ill for SA’s inflation trajectory and interest rate outlook. 

Headline producer price inflation (PPI) accelerated from 4.6% in May to 5.9% in June, according to figures released by Stats SA on Thursday. This far exceeded the market consensus for an increase to 5.2%.

The main driver was the petroleum category, which added 3.1 percentage points to the headline figure. This reflects the fact that petrol and diesel prices rose by 82c/l and 85c/l, respectively, in June as a result of a higher international oil price and a weaker rand.

Fuel prices rose again in July, by a further 23c/l for petrol and 26c/l for diesel, suggesting that the PPI is set to keep climbing. However, the Department of Energy does not expect petrol price increases in August.

Investec economist Lara Hodes notes that, fortunately, food price dynamics exerted a dampening influence on manufacturing industry prices, supported by the ample maize supplies and moderating meat price increases.

She expects moderate food price inflation to persist for the remainder of 2018.

At its monetary policy committee (MPC) meeting last week, the Reserve Bank noted that SA’s inflation outlook was deteriorating, mainly as a result of supply-side factors.

The Bank’s approach is to look through the first-round effects of petrol price induced increases to inflation. But it has warned that it “will not hesitate to act should there be second-round effects that take us significantly away from the midpoint of the inflation target range”.

The weak state of domestic demand, which reduces the ability of firms to pass higher fuel costs on to consumers by raising the price of their goods and services, is likely to suppress the emergence of second-round effects to some extent.

The Bank now expects headline consumer inflation to peak at about 5.7% in the first half of next year, close to the upper end of the target range, and to average 5.6% for 2019 (up from 5.2% previously) before declining to 5.3% at the end of 2020. It also considers the risks to the inflation forecast to be on the upside.

Nedbank economist Johannes Khosa said that while consumer inflation was likely to increase, he did not foresee the consumer price index exceeding the upper limit of the target range over the next three years.

“This relatively benign inflation outlook and the still-weak economy will probably convince the MPC to delay hiking rates for as long as possible.”
Business Live 

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