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Producer inflation vs consumers inflation
Date: 3 September 2018 Category: Economics |
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We take a look at the inflation rates of both producers and consumers in South Africa over the last couple of years. And we also track the consumer inflation rate of goods only and find that this moves in a similar fashion to producer inflation levels, while the official inflation rate does not always track the producer inflation rate. Reason for this is the large weight of services in the consumer inflation basket while the producer inflation rate does not measure services.
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Picture: Reuters
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Producer inflation vs Consumer Inflation vs Consumer Inflation (Goods only)
The graphic below shows the year on year inflation rate of the following:
- Producer inflation (PPI) of all final manufactured goods
- Consumers inflation (CPI) for all goods and service
- Consumer inflation for goods only
The light blue line is the producer inflation rate, the dashed black line the official inflation rate (which includes all goods and services), while the red line is the consumer inflation rate for goods only. While the trends of all three are very similar readers will note that when the producer inflation rate declines (the blue line dropping), the red line which is the consumer inflation rate of goods only, also drops in a very similar fashion. While the consumer inflation (for goods and services) also declines, the level of the decline is far slower. Basically the inflation rate of goods falls a lot further than the inflation rate which includes goods and services.
The reason for this is the fact that the price of services tend to be more "sticky". So what are "sticky prices". Well "sticky prices" refers to prices which are slow to change, be it increasing or decreasing. The prices of goods tend to be far more volatile, as shown by the red line, compared to the dashed black line.
If retailers want to get rid of a product quickly prices will be reduced quickly, or of retailers see the input costs of a particular item is increasing quickly or the demand for a product is high, they will quickly increase prices to either pass the higher input costs onto consumers, or to make higher profits from goods that are in high demand. Services on the other hand tend to move more slowly. If a plumber charged R500 an hour, he is less likely to drop his price to say R300 an hour if business is slow in a particular month. He is also far less likely to push his price from R500 an hour to R800 an hour if he has a busy month. And this effectively explains sticky prices. The prices of services tend to be far more sticky than that of goods. Thus services prices will be slower to decline and slower to increase than that of goods.
Average inflation for the three categories since January 2013:
While the producer inflation and inflation for all goods and services have very similar levels since January 2013, as mentioned earlier the behaviour in terms of volatility is a lot different between CPI for all goods and services and the CPI for goods only. The below shows the average deviation of the three over the time period. The deviation in this case measures the average difference between the mean values above and the monthly recorded values. The higher the deviation the more volatile the series, the lower the deviation the more stable the series. Note the percentage shown below reflects basis points not actual percentages.
So based on the above we can confidently say that based on the mean values and average deviation values the three series will tend to fall between the following limits:
The reason for this is the fact that the price of services tend to be more "sticky". So what are "sticky prices". Well "sticky prices" refers to prices which are slow to change, be it increasing or decreasing. The prices of goods tend to be far more volatile, as shown by the red line, compared to the dashed black line.
If retailers want to get rid of a product quickly prices will be reduced quickly, or of retailers see the input costs of a particular item is increasing quickly or the demand for a product is high, they will quickly increase prices to either pass the higher input costs onto consumers, or to make higher profits from goods that are in high demand. Services on the other hand tend to move more slowly. If a plumber charged R500 an hour, he is less likely to drop his price to say R300 an hour if business is slow in a particular month. He is also far less likely to push his price from R500 an hour to R800 an hour if he has a busy month. And this effectively explains sticky prices. The prices of services tend to be far more sticky than that of goods. Thus services prices will be slower to decline and slower to increase than that of goods.
Average inflation for the three categories since January 2013:
- Producer inflation (PPI) of all final manufactured goods: 5.7%
- Consumers inflation (CPI) for all goods and service: 5.5%
- Consumer inflation for goods only: 5.2%
While the producer inflation and inflation for all goods and services have very similar levels since January 2013, as mentioned earlier the behaviour in terms of volatility is a lot different between CPI for all goods and services and the CPI for goods only. The below shows the average deviation of the three over the time period. The deviation in this case measures the average difference between the mean values above and the monthly recorded values. The higher the deviation the more volatile the series, the lower the deviation the more stable the series. Note the percentage shown below reflects basis points not actual percentages.
- Producer inflation (PPI) of all final manufactured goods: 1.5%
- Consumers inflation (CPI) for all goods and service: 0.8%
- Consumer inflation for goods only: 1.5%
So based on the above we can confidently say that based on the mean values and average deviation values the three series will tend to fall between the following limits:
- Producer inflation (PPI) of all final manufactured goods: 4.2% - 7.2% (the values are calculated by taking the mean value and adding and subtracting the deviation values for the upper and lower levels respectively)
- Consumers inflation (CPI) for all goods and service: 4.7% - 6.3%
- Consumer inflation for goods only: 3.7% - 6.7%