Increasing PPI and CPIX Gap pressures for the rate

The gap between the PPI and CPIX widened further in May strengthening the case for another increase of 50 basis points in interest rates in August.

PPI increased 11.3% in May from a year ago and 1.1% between April and May. This follows the increase of 6.4% in the CPIX from 6.3% in April. The gap between PPI and CPIX (graph 1) therefore widened to 4.9% from 4.8% in April suggesting more pressure on the CPIX to increase in months to come.

PPI pressures in May were dominated by locally produced products, though imported products also played its part. Locally produced products increased 1.2% between April and May (11.1% year on year) whilst imported prices increased 0.7% month on month and 11.7% year on year.

Significant drivers of PPI which will impact the CPIX are:
 
* Agriculture which increased 20.5% compared to 21.9% in April. The reason for the slower growth is a monthly decline of 1.7% in food, which brought the year on year increase to 14.5% compared to 18.1% in April. The main contributor to the monthly decline in food was meat prices, which declined 2.3% compared to April, reducing the year on year increase to 10.6% from 12.8% in April. However, the monthly decline in meat prices is a temporary factor as farmers are slaughtering more cattle due to the drought. This will switch back to an increase as high grain prices (already 41.3% higher than a year ago) feed through to cattle feeding. It normally takes 8 to 11 months before increases in agricultural prices are taken up in retail prices. Therefore more pressure on food prices at the CPIX level is to come.

* Food at manufacturing which increased 14.2% compared to 12.6% in April. The faster increase was due to a month on month increase of 2.1%. Manufactured meat increased 9.1% year on year. The increases in manufactured food normally feeds into higher CPIX prices after two quarters, suggesting more pricing pressure and thus for CPIX to remain high (graph 2).

* Mining and quarrying, specifically metal ores and other minerals. Metal ores increased 50.2% and other minerals, which include crude oil, increased 16.6% on a year on year basis. Products of petroleum and coal, which include refined oil, increased 17.7% year on year.

* Electrical machinery which increased 24.6% compared to a year ago and basic metals which increased 23.7%.

It is now clear that cost push pressures are complementing demand driven factors in keeping price increases at an elevated level. Together with other inflation risks such as the current account deficit which increased in the first quarter compared to a year ago, an increase in the repo rate in August seems non negotiable.    

As a result the current downward correction in the share markets continues. The JSE All Share Index  (ALSI) already decreased by more than 300 points within the first two hours after the announcement of the PPI numbers. The ALSI now have lost by 13:00 today 1480 points or 5% since the record high level of 29633 reached on June 20.

Graph 1

Graph2