PPI surge signals hidden inflation risks

THE sharp increase seen in the latest producer price index (PPI) numbers could mean higher prices for everyday goods and services than what the consumer price index (CPI) may suggest.

June’s PPI uptick of 9.2% year-on-year (y-o-y) marked the strongest increase in 48 months.

In particular, while crude materials for further processing have begun to decelerate (from 31.5% y-o-y in May to 25% y-o-y in June), intermediate materials, supplies and components continued to climb (from 3% y-o-y in May to 7.4% y-o-y in June).

This points to an incomplete and gradual cost past-through downstream, with upstream cost pressures still working their way through the supply chain and feeding into consumer prices with a lag.

An economist told StarBiz 7 that some of this reflects delays in cost past-through rather than absorption, with firms smoothing price increases over several months, partly to maintain relationships within the supply chain.

Upstream oil and gas companies, plantation players and export-oriented manufacturers with differentiated products – such as electrical and electronics, semiconductor and specialty chemicals – generally enjoy stronger pricing power, allowing them to pass on higher costs more easily.

Commodity producers may even benefit from higher selling prices.

Businesses with limited pricing power, such as food and beverage operators, transport companies and logistics providers, may have little choice but to temporarily absorb the increases.

However, they can do so only for so long before being forced to raise prices. While some increases may be delayed, they are unlikely to disappear altogether.

This means consumers may feel higher inflationary pressure even when the CPI print appears modest. Headline CPI eased to 1.9% y-o-y in June from 2% in May, but a subdued reading should not be mistaken for an absence of inflationary pressures.

Subsidies and price controls may help contain the official inflation rate, but they do not eliminate the underlying cost pressures businesses continue to face.

Instead, they may simply delay how quickly those pressures are reflected in the prices consumers ultimately pay.