March’s factory gate inflation dipped into deflation at 1.9% y/y – the lowest since October 2019 primarily dragged by poor crude oil prices. Brent fell by 49.7% y/y to average US$26.69 per barrel in March. Drag also came from utilities OSHA’s, electricity and water.

Going forward, the factory gate inflation is more likely to be in the negative growth trajectory. However, the downside will be limited in view of the low base comparison. With low producer price, we expect the impact on consumer price will also be muted. We expect consumer inflation to hover between +0.3% and -1.5%.

• March’s factory gate inflation fell into deflation for the first time since October 2019. In the month of March, the headline PPI fell by 1.9% y/y from +0.9% y/y in February. This brings the 1Q2020 average to 0.6%. On monthly basis, the headline PPI fell 3.0% m/m in March from -1.3% m/m in the previous month.

• Poor PPI was mainly due to the sharp fall in mining, down by 35.8% y/y in March – sharpest drop in nearly five years, from -5.2% y/y in February. Drag was due to sharp drop in crude oil prices, with Brent down by 49.7% y/y to average US$26.69 per barrel from US$33.73 per barrel average in February (US$67.03 per barrel in March 2019).

• At the same time, softer price was seen in (1) electricity and gas supply down by -0.3% y/y from +1.6% y/y in February; and (2) water supply fell by -0.3% y/y in March from -0.8% y/y in the previous month Meanwhile, manufacturing cost rose at a slower pace by 0.6% y/y growth from 0.8% y/y in February. However, the downside pressure was cushioned by the increase in agriculture, forestry and fishing prices, up 13.4% y/y from 9.2% y/y in February.

• Looking at price pressure by stage of processing, crude materials declined by 13.9% y/y from +0.1% y/y in February while the intermediate goods prices slowed down to 0.8% y/y from 1.5% y/y in February. However, prices of finished goods rose faster to 0.7% y/y in March from 0.2% y/y in February.

• Going forward, the factory gate inflation is more likely to be in the negative growth trajectory. However, the downside will be limited in view of the low base comparison. With low producer price, we expect the impact on consumer price will also be muted. We expect consumer inflation to hover between +0.3% and -1.5%.

Source: AmInvest Research - 4 May 2020