DECREASING PPI TREND GOOD FOR FUTURE CPI EASING, BUT WORRISOME TO PRODUCERS – SEIFSA
Johannesburg, 26 April 2018 – Although the declining Producer Price Index (PPI) will help cushion the impact of a future increase in the headline Consumer Price Index (CPI), it is worrisome to producers, Steel and Engineering Industries Federation of Southern Africa said today.
The annual producer price inflation data released by Statistics South Africa today indicate the continued easing of inflationary pressure on goods produced by manufacturing firms. The PPI for final manufactured goods dropped to 3,7% year on year in March 2018, down from 4,2% in February 2018; while the year-on-year PPI for intermediate manufactured goods fell to -1,3% in March 2018, from 0,4% in February.
SEIFSA Chief Economist Michael Ade said the improvement in producer inflationary pressure was due to a stronger rand, which reduced the cost of inputs, and the subdued prices of both intermediary and retail products caused by lower demand.
“Considering that the PPI acts as a preview of changes in the future rate of inflation, the lower trending figure for March may help in reducing an expected increase in the headline CPI for April, notwithstanding the VAT increase and higher domestic fuel prices,” Dr Ade said.
He said that although there was an improvement in inflationary pressure on consumers in March, the declining trend in PPI for intermediate manufactured goods, which specifically measures factory gate prices for the M&E cluster, does not augur well for domestic producers. This is because consistent decline in selling price inflation further squeezes producers’ margins, making it harder for producers to pass input price increases for intermediate manufactured goods on to consumers.
“Generally, given that the demand for both intermediate and retail or finished goods tends to be more price elastic, the decreasing trend in PPI for intermediate manufactured goods is perturbing since it makes it difficult for producers to pass on cost increases in the market. Producers are, therefore, compelled to absorb some of the volatility in input prices in order to keep prices more stable, given the psychological benefits of keeping prices stable,” Dr Ade said.
However, given the possibility of an improvement in the current business cycle, against the backdrop of improving commodity prices as well as business and consumer confidence, Dr Ade said he expected a rebound in producer inflation over the coming months, which will help producers recoup some of the losses incurred from volatility in input prices.
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SEIFSA is a National Federation representing 23 independent employers.
Associations in the metals and engineering industries, with a combined membership of 1600 companies employing around 200 000 employees. The Federation was formed in 1943 and its member companies range from giant steel-making corporations to formed in 1943 and its member companies range from giant steel-making corporations to micro-enterprises employing few than 50 people.