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Fall in producer inflation sharper than expected
Fall in producer inflation sharper than expected

Fall in producer inflation sharper than expected

MARKETING NEWS - Jan 30th 2015, 10:05

Annual producer price inflation dropped more than expected in December as the steep slide in the international oil price fed through into lower prices at the factory gate. 

This is a trend that economists expect to continue for at least the first half of the year, helping to maintain a steady decline in consumer inflation over the next few months.

Producer price inflation slowed to 5.8% last month from 6.5% in November, figures released by Statistics SA showed on Thursday.

This compared with 6.9% and 6.7% in the preceding two months.

Between November and December, the annual rate of consumer inflation (the consumer price index) also improved sharply, to 5.3% from 5.8%. Slowing international oil, food and agricultural crop prices are the main reason for the improvement in SA’s inflation outlook.

Given abundant supplies of oil and muted global growth prospects, most analysts expect the current low oil prices of about $50 a barrel to persist for some time. Producer prices declined 0.2% month on month between November and December last year, driven down mainly by the coke, petroleum, rubber, and plastic products category, which fell 2.6%, contributing 0.4 percentage points to the overall slowdown in producer price inflation.

Agricultural food price inflation remains low, having measured 1.4% in December. A bumper maize crop is expected this year, according to the Reserve Bank, which should keep a firm lid on maize prices.

Global food prices are also in decline. The Food and Agricultural Organisation’s food price index fell 3.7% over the course of last year.

But Investec chief economist Annabel Bishop said in a research note that moderating agricultural food prices were not feeding through as quickly to the processed food level, since factories had to contend with other high costs, such as wages and state-administered prices for inputs such as water and electricity.

Consumer price inflation is only loosely correlated to producer price inflation due to the heavy commodity bias in the producer price index rate of final manufactured goods.

But in terms of directional trends, producer price index inflation still tends to lead consumer price index inflation by about two months, Ms Bishop said.

The Reserve Bank now expects consumer inflation to average 3.8% this year, compared with the 5.3% forecast previously, and to remain within the 3%-6% target band for the next two years.

However, it has warned that even a moderate increase in oil prices this year will reverse SA’s favourable inflation trajectory.From DFM Publishers (Pty) Ltd 

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