South African producer price inflation (PPI) again surprised the market to the upside in April, rising 8.8% year-on-year, surpassing the March figure of 8.2% and exceeding consensus expectations of an 8.4% rise, Statistics South Africa said on Thursday.
In month-to-month terms, PPI inflation grew by 1% against a rise of 1.3% in March, while price growth in the subcategories made a positive contribution of 7.2% to yearly headline PPI and 0.8% to monthly PPI, Investec said.
According to the bank, the main upward inflationary pressures observed throughout the first quarter of the year stemmed predominantly from higher prices of food, petroleum products, transport equipment and machinery – a trend that persisted into April.
Investment banking firm BNB Paribas economist Jeffrey Schultz added that, year-on-year, the largest contributors to the headline rise in PPI emerged from food beverages and tobacco products, which grew 8.3%; coke, petroleum, chemical, rubber and plastics, which rose 10.8%; metals machinery and equipment, expanding by 7.9%; and transport equipment, which expanded 11.1%.
Moreover, manufactured food prices continued to surprise to the upside, registering monthly price gains of 1.1% and pushing the year-on-year growth rates to their highest levels since 2012.
“We expect these pressures to continue to filter through into consumer price index food prices over the coming months, as the impact of the weaker rand and rising domestic input cost pressures continue to filter through into domestic prices,” Schultz commented.
Encouragingly, he added, agricultural price pressures abated, contracting 4.9% month-on-month in April after climbing 2.6% the prior month.
This pushed the year-on-year growth rates in agricultural prices to 8%, after spiking to 13.3% in March.
“While it is too early to gauge whether or not price pressures at the farm gate – particularly within grains and fruit and vegetables – are easing, evidence of [lessening] global agriculture price pressures and what looks to be a bumper local maize crop this year suggest room for some modest respite over the coming months and is something we will be keeping a close eye on,” Schultz said.
Meanwhile, the PPI of intermediate goods remained in double digits in April, climbing to 10.2% year-on-year from 10.1% in March.
Schultz explained that, while this still showed evidence of elevated input cost pressures for domestic producers, the recent moderation in the Purchasing Managers Index in April could perhaps also point to some modest relief.
He cautioned, however, that sustained weakness in the currency would likely keep imported intermediate good prices elevated.
Elaborating on the “bottom line”, the economist said the upside surprise in South African producer prices in April further underlined the South African Reserve Banks’s (SARB’s) monetary policy dilemma of rising domestic inflation amid a weakening economic climate, or stagflation.
“While the moderation in agricultural price pressures perhaps suggest some respite for local food prices from price trends in both global and local soft commodities of late, it is too early to tell whether this is likely to sustain. Furthermore, the continued ramp-up in manufactured food prices in April suggests to us that CPI food prices still have room to climb higher,” Schultz held.
BNP Paribas said it would, therefore, maintain its view that consumer prices would continue to climb in the coming months, peaking at around 6.6% in June and remaining outside the SARB’s upper 6% inflation target band until the second half of 2015.
“While the real economy remains weak, we believe that a more uncomfortable domestic inflation environment is likely to force the SARB’s hand in hiking policy rates, albeit modestly, in the second half of 2014. The pace and magnitude of these increases, however, will remain highly data dependent,” said the agency.