December’s PPI was higher than expected

ANNUAL headline producer price inflation (PPI) quickened to 7.1 percent in December from 6.9 in November, higher than the market expectation of 6.9 percent.

However, Nedbank said both producer and consumer inflation were forecast to slow this year, which should give the Reserve Bank some room to pause its rate hiking cycle.

“The biggest threat to the inflation outlook, though, remains the rand.

“Should the currency hold up as it has in the first few days of 2017, and barring any excitement from other domestic and external shocks, interest rates are likely to have peaked with gradual declines starting in the second half of the year and into 2018,” the bank said.

The PPI for final manufactured goods increased by 0.5 percent month-on-month in December, compared to the 0.4 percent month-on-month rise in the previous month.

On a monthly basis, producer prices rose by 0.5 percent as contributions of 0.1 percentage points by the food products, beverages and tobacco products category as well as 0.2 percentage points by each non-metallic mineral products.

Elize Kruger, an analyst at NKC African Economics, forecast that both price indicators were close to their respective peaks due to the base effects, with “prices pushed considerably higher in the early months of 2016 due to food price hikes”. Kruger expected price pressures to ease over the course of this year, because of a stronger rand compared to last year, lower food prices as good rains alleviated the current drought conditions, and weak local demand conditions.

“As a result, we expect that the Reserve Bank will keep the repo rate unchanged at 7 percent throughout 2017.

“However, some risks remain, particularly relating to international oil prices, higher food prices for longer than envisaged and the ever-present risk that the recent strengthening trend in the rand exchange could reverse and that the currency could become a significant driver of inflation again,” she said.