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Producer inflation expected to accelerate in coming months

| Economic factors

Producer inflation slowed unexpectedly last month compared with a year ago as food prices, which make up 25% of the producer inflation basket, rose at a slower pace.

Despite producer inflation for final manufactured goods having moderated slightly to 3% year on year from 3.1% in March, economists expect it and consumer inflation to accelerate in coming months on rising food and fuel prices. Producer inflation was up 0.9% during the month.

Manufacturers have been "absorbing" higher water and electricity prices which they have not passed on to consumers because of "muted market conditions", Manufacturing Circle executive director Coenraad Bezuidenhout said.

Mr Bezuidenhout added, however, that higher labour costs, as well as steep electricity and water tariffs, would force manufacturers to pass costs on to consumers at some point.

Any favourable commodity price developments on producers’ costs were being partly mitigated by high administered tariff increases, particularly electricity, said Investec economist Kamilla Kaplan.

The petrol price has been rising since March, and an increase of about 50c/litre is expected to be announced on Friday for next month.

Inflation would "rise rapidly" now that petrol prices were recovering, analysts at international credit insurer Coface said in a research note.

Food prices are also expected to rise because of a drought that has affected maize crops.

Grain SA estimates that the country will have to import 727,000 tonnes of maize this year.

Food products, beverages and tobacco products — which are grouped in one category that makes up 33% of the producer inflation basket — as well as metals, machinery, equipment and computing equipment were the main contributors to headline inflation.

Intermediate manufactured goods inflation fell last month, which should be positive for producers because of the importance of such goods in the production processes.

The annual producer inflation for electricity and water rose sharply by 10.4% last month, compared with 8.6% in March, amid steep increases in the prices of these resources.

More increases could follow as Eskom has applied for an additional electricity tariff increase this year on top of the 12.7% already implemented last month.

But rises in food and the petrol price will not be the only contributing factors to an increase in producer inflation in future — the lagged effect of a weak rand on prices will also be another determinant.

Uncertainty about how a weaker rand would impact prices was concerning for monetary policy authorities, Reserve Bank deputy governor Francois Groepe said this week. "We have seen far more muted pass-through in the past few years, than during previous episodes of rand depreciation and the Bank estimates that actual pass-through could be about half of what is assumed in the forecast model."

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