Monday, February 20, 2017 4:35 PM /Research
An implicit price deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy: Which is represented is always represented in an index form to gauge the extent of changes price level or inflation in an economy.
It is also a gauge, to measures how gross domestic product reacts to changes in domestic prices. it is important indicator so as to project on how gross domestic product will react to prices, especially when the economy seems to be experiencing price- trough effects.
Fig; graphical illustration of 3rd quarter implicit price deflator
Most sectors continued to experience price weakness in the 3rd quarter of 2016, except agricultural sector. The agricultural sector continued its recovery, making it four subsequent quarters in a row.
This was reflective as its curve caved inwards from 127.35 to 127.08 to gain back 0.27 points along the implicit price index, ensuring it maintains a southward travel. The price recovery in the agricultural sector for the 3rd quarter was softer than the previous quarter, where it earlier experienced a recovery of 2.98 points.
The softened price recovery was as a result of the inherent usual third quarter seasonality effect on the agriculture sector: which is driven by structural factors. The industry sector suffered price weakness for three quarters in row; while it was most hit by price weakness in the 3rd quarter of 2016.The sector experienced a price weakness of 22.25 points to move upwards from 105.23 to 127.78 along the index curve.
This price weakness was more pronounces compared to the previous quarter, due to the price onslaught experienced in sub sectors like oil and basic iron and steel. It must be noted that persistent rising cost of intermediate goods due to FOREX supported the northward travel of the curve.
The construction sector for seven quarters in a row, continued to experience price weakness. Eventually leading the curve to jolt upwards from 143.01 to 144.78, this reflects a 1.77 point rise along the index. Compared to the previous quarter, when it weakened by 8.29 point quarter, suggesting price weakness in the sector is abating; regardless conditions in the fourth quarter will justify earlier suggestion or rebuff it as a random movement.
The trade sector suffered price weakness for 8 months on a row, as both cyclical and structural pressure support its uptick. The price weakness in the sector rose from 175.37 to 189.92, to experience a price weakness of 8.29 point; the sector suffer it highest weakening in 3rd quarter of 2016.
More importantly the sector, most of the time absorbs price weakness from other sectors, eventually making it vulnerable to pass through effect. Given such peculiar nature of the sector, it always flies the peak point on the index compared to all other secors on the index.
The service sector tilted upwards along the implicit price index from 162.5 to 168.50, to experience a weakening of 6.37 points: suffering its fourth quarter in a row of price weakness, at the same time due to structural factors its experiences price swings. Holistically the gross domestic product suffered another quarter of price weakness, making it two quarters in row of price weakening.
Therefore the gross domestic product curve ticked upwards from 151.12 to 145.64, to suffer a weakening of 5.48 points: which led the Gross domestic product curve to cave outwards once again along the implicit price index.
It is important to identify that the price weakness experienced by gross domestic product in third quarter of 2016 softened, compared to the previous quarter: When it experienced a weakness of 6.48 points in that particular quarter. This is partly due to prices rising at a lower rate.
We at Proshare are of the opinion that price weakness on gross domestic product will continue to abate into subsequent quarters, given the data available: Largely due to the fact that runway inflation is been replaced with a more creeping one. Our position also hinges on the premise that earlier wild swings in both nominal effective exchange rate and real effective exchange rate that were partly responsible for negative price shocks are fading off gradually.
1. CPI Rises to 18.72% in January 2017, 0.17% Higher Than 18.55% December 2016 Rate