PPI update: PPI inflation moderated in March, primarily on the back of fuel price relief and sustained low food price inflation

25 Apr 2018

Annabel Bishop

Chief Economist

Figure 1: Food price inflation at agricultural, manufactured and retail levels
PPI inflation decelerated to 3.7% y/y in March from 4.2% y/y in February. This was below consensus expectations of 4.0%
 
The rate of inflation in the coke, petroleum, chemical, rubber and plastic products category, was the primary contributor to March’s PPI number. This segment, which holds the second largest weighting in the PPI basket of 21.0% moderated to 5.7% y/y in March from a prior 7.5% y/y. As such the contribution from this category receded to 1.2% from 1.6% previously. Within this segment, the petrol and diesel price components contracted notably, on the back of petrol and diesel price cuts of 36c/litre and 47c/litre respectively in March.
 
Additionally, food price dynamics have been a key influencing factor on the moderation in PPI. Manufactured food price inflation peaked at 13.4% y/y in August 2016 and has steadily declined, to -1.1% y/y in March 2018. As such the contribution from the food products, beverages and tobacco products category, which holds the largest weighting in the PPI basket at 34.8%, moderated to 0.2% in March from 0.3% in February.
 
CPI inflation fell below the midpoint of the inflation target in March, however this is likely to be the bottom of the current inflation cycle and price pressures will intensify in April, following a lift in the petrol and diesel price, accompanied by the addition of the fuel and road accident fund levies as stipulated in the 2018 budget.
 
Furthermore, additional consumer taxes set out in the budget, which came into effect from the 1st April will heavily impact inflation for the twelve months, commencing from Q2.18 and so elevate the PPI outcome. However inflation is expected to remain within the target range during the forecast period.
Figure 2: PPI inflation (%)
Figure 3: Contributions to PPI inflation