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Press Release – 2014/09/25: EASING PRODUCTION INFLATION REFLECTS WEAK DOMESTIC FUNDAMENTALS

By 25th Sep 2014Sep 20th, 2019No Comments

The producer price index (PPI) for final manufactured goods rose 7.2% when August 2014 is compared with the same month last year. This is down from the year-on-year 8% recorded in July. More shockingly, the PPI for intermediate manufactured goods increased by 6.7% when August 2014 is compared with August 2013, down from the 8.5% increase recorded in July.

“Theoretically, amongst other variables, strong economic growth causes inflation. At a macroeconomic level, if aggregate demand is greater than aggregate supply, the result is upward pressure on inflation. The reverse is true that if you cannot sell a product at a specific price, then you have to reduce the price of the product. This fact is evident in the PPI figures, given the lacklustre growth in the manufacturing sector and the broader South African economy,” SEIFSA Economist Tafadzwa Chibanguza said.

Compounding this disinflationary trend in August would have been a number of additional factors. Firstly, the exchange rate held a relatively stable level in August (averaging $1/R10.66 for the month), thus easing the inflationary pass through.

Secondly, recovering production levels as companies returned to production after the July strike in the metals and engineering industries meant that companies were still far from full capacity. Lastly is the softer brent crude oil price, which decreased by about four percent in dollar terms in August.
“All these factors would have contributed to the easing in production inflation,” said Mr Chibanguza.

He added: “While we certainly welcome this disinflationary pattern in producer inflation and the knock-on effects that it will have on consumer inflation and relief to a fragile economy, it is the underlying pattern causing the trend that is of concern.”

Mr Chibanguza said that a further concern was that the disinflationary trend could be very quickly reversed owing to the fact that it was not based on strong domestic fundamentals such as higher productivity and/or improving efficiencies like transport infrastructure and electricity supply constraints.

“Currency fluctuation (accounting for just under 50% of the movement in domestic production prices) poses the greatest risk to producer inflation. The recent bout of the $1/R11.00-R11:18 does not bode well for inflation, and will most certainly reverse the trend to an inflationary one in the next reading,” Mr Chibanguza concluded.

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