Slow Demand Likely To Keep Inflation In Check

30 April 2021 – Producer prices, which have risen at their fastest pace in two years, do not necessarily signal higher inflation and interest rates because a weaker economy implies weaker demand.

The producer price index (PPI) accelerated to an annual rate of 5.2% in March, its fastest since June 2019, Stats SA said in a statement on Thursday.

The PPI indicates rising input costs for factories/producers, which they then may pass on to retailers and consumers, thereby setting future trends in inflation, which the Reserve Bank closely monitors when deciding on interest rates.

Though consumer inflation picked up in March, it remains below the midpoint of the Bank’s target range of 3%-6%, leaving it scope to keep rates at a record low of 3.5% as the economy recovers from its biggest annual contraction in more than 100 years.

Food prices, which were key drivers in producer prices in March, could also moderate in the coming months as a result of the good summer season, in which ample crops are expected.

SA is set to produce 16.095-million tonnes of maize in 2021, according to preliminary estimates released by the crop estimates committee, an agency within the department of agriculture, forestry and fisheries. This is the second-biggest maize crop ever recorded in SA. The largest was in 2017 when the country produced 16.820-million tonnes.

SA consumes, on average, about 10-million tonnes of maize a year, which is used as an input in a variety of food products. 

“We maintain our view that the Bank will keep policy rates unchanged this year, focusing on the pace of recovery and subdued core inflation,” Rukayat Yusuf and Jure Jeric, analysts at Bank of America Merril Lynch global research said in a note, adding that they only expect rates to rise in 2022.

The PPI was worse than a Bloomberg median estimate of 4.6% in March. In February, PPI was at 4%.

Prices of food products, beverages and tobacco products — which make up just more than a third of the producer inflation basket — increased by 6.8% year on year and contributed 2.4 percentage points. 

The recent rise in fuel prices also exerted upward pressure on factory gate prices.

Coke, petroleum, chemical, rubber and plastic products increased by an annual 4.2% and contributed 0.9 percentage points, Stats SA said.

Measured on a month-to-month basis, PPI was 1.3%.

“Low statistical base effects caused by the pandemic on both demand and supply dynamics are likely to buoy the year-on-year PPI inflation rate for the remainder of 2021,” Investec economist Lara Hodes said. Source (BusinessLive)