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The farm prices of fruit and vegetables fell, but cereals got more expensive, according to November’s producer price index.
The farm prices of fruit and vegetables fell, but cereals got more expensive, according to November’s producer price index.

Farm and factory gate inflation slows slightly

ECONOMIC NEWS

By Robert Laing and and Sunita Menon - Dec 14th 2018, 09:00

Falling fruit and vegetable prices helped slow producer inflation in November. 

Farm and factory gate inflation, as measured by the annual change in the producer price index (PPI), slowed to 6.8% in November from 6.9% in October, Statistics SA reported.

The slight slowdown matched economists’ consensus.

According to Stats SA, the average wholesale price of fruit and vegetables was 2.1% lower in November than the same month in 2017. The wholesale price of meat fell 0.9% over the year, and sugar prices fell 4.6%.

But cereals getting 8.6% more expensive, and bakery products 5.9%, brought the overall food component of producer inflation to 2.3%.

Fuel was the main driver of rising producer inflation, with diesel prices showing an annual increase of 30.2% and petrol 23.7%.

“Producer inflation is expected to ease further and dip below 6% in the short term, mainly as a result of lower fuel costs. Upside risks to the inflation outlook are likely to emanate from the high risk of another El Niño weather event, which would lead to an increase in food prices as well as an unexpectedly large electricity tariff increase,” Nedbank’s economics team said in a note e-mailed last week.

Stats SA reported that the consumer price index (CPI) showed a slight increase in November to 5.2% from 5.1% in October. The annual change in CPI is the key measure of inflation used by the Reserve Bank’s monetary policy committee to set interest rates.

The committee will announce its next interest rate decision on January 17 and is generally expected to hold its repo rate at 6.75% after increasing it from 6.5% on November 22.

“Given that the increase was considered a form of risk management or buying insurance against future risk scenarios, it is likely to be a once-off event and interest rates will probably remain unchanged for some time,” said NKC economist Elize Kruger.

“Both consumer and producer inflation are expected to soften in the next few months. This and the still-weak economy will therefore probably convince the monetary policy committee to keep interest rates unchanged at its January meeting and maintain a neutral stance for much of the year before resuming the upward cycle in November 2019,” Nedbank said.

Momentum Investments economist Sanisha Packirisamy expects two more rate hikes between 2019 and 2020. “A muted growth profile prevents a sharper acceleration in interest rates,” she said.

That the annual change in CPI swings less wildly than PPI is due to an economics phenomenon known as “price stickiness”. Retailers tend to resist sharp price increases to keep their customers happy and try to average out the seasonal rises and falls in commodity prices.
Business Live 

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