Economics Correspondent
FIGURES released yesterday by Statistics SA show a decline in the production price index (PPI) to 1,5% year on year in July compared with a rise of 2,3% a month earlier .
The slowdown in PPI growth is heartening, but looking deeper , the deceleration in PPI last month is not all good news.
June's surge in producer inflation to 2,3% from 1,2% in the previous month was largely a once-off increase in inflation as a result of an adjustment to electricity tariffs for the winter months.
After June's blip in the PPI numbers, inflation was expected to slow to the levels recorded yesterday.
But the sharp rise in the domestic component of PPI during the month should temper some of the optimism of declining inflation. It could be that PPI has bottomed and may start rising once again, putting upward pressure on consumer prices in coming months.
Producer prices for SA industries increased 1,3% month on month, resulting in domestic producer inflation steadying to 4,4% year on year in July, compared to the previous month.
Boosting producer inflation during the month was a 5% rise in agricultural prices, mainly due to increases in fruit and vegetable prices.
The main contribution to the deceleration in producer inflation comes from the imported component of the PPI.
Imported inflation contracted 6,4% year on year last month from a decline of 3,4% in June, as a result of the rand's continued strength.
The rand has firmed more than 60% against the dollar since the beginning of last year, dramatically reducing the cost of imported goods since then.
The rand's appreciation has helped temper producer inflation, which soared to a peak of 15,4% in September as a result of the rand's crash in 2001. The slump in producer inflation to 1,2% year on year in May was the lowest rise in the index in more than 30 years.
But do last month's PPI figures signal an end to the downward spiral in inflation? Has PPI bottomed out or will it rise from now on?
Nedcor economist Magan Mistry said PPI was likely to bottom out around the 1% level, perhaps decelerating to a low of 0,8% in October.
This means there is some scope for producer prices to decline, but it all depends on the behaviour of the rand, says Mistry.
He expects the rand to stabilise in the fourth quarter before weakening slightly by the end of the year.
As a result, imported inflation could stabilise and with base factors (comparing PPI numbers to higher base figures of last year) coming into play, producer inflation may begin to rise steadily by December, says Mistry.
Another factor clouding the outlook for PPI is the dollar price of oil, which could boost inflation if it continues to increase from its current levels of around $30 a barrel.
"Our outlook for the dollar oil price is that it can firm by the end of the year as a result of higher demand as we move into the winter months in the northern hemisphere and because Iraqi oil exports have not come on line yet," said Mistry.
But the producer inflation numbers were still at record low levels and should add to the positive outlook for inflation, giving the Reserve Bank enough reason to cut interest rates by at least one percentage point in October, says Mistry.
Old Mutual Asset Managers' senior economist Johann Els said the rise in agricultural and electricity prices in the recent PPI figures was not worrying at all.
"Food inflation was positive in the month, but food prices are quite volatile and there are seasonal factors that influence it. It is nothing to worry about yet, but we will have to watch it closely," says Els.
Given the rand's strength and low price pressure globally, the outlook for PPI was positive, says Els.
"There is downside potential to PPI, but not as much as we have seen," he says.
PPI would probably stabilise around 1,1% this month until November, before starting to increase by December, says Els.
After disappointing inflation figures earlier this week, market optimism for aggressive interest rate cuts has been reduced considerably.
From expecting another two percentage point cuts in interest rates this year, markets are now expecting between one and 1,5 percentage point cuts by December.
Aug 28 2003 08:44:16:000AM Nasreen Seria Business Day 1st Edition
Publisher: Business Day
Source: Business Day
Better PPI bodes well for inflation.
Posted On Thursday, 28 August 2003 02:00 Published by eProperty News
Producer inflation numbers at record lows lift optimism for more rates cuts.
Latest from eProperty News
- Love and property: a homebuying guide for couples
- From Civic Landmark to Collaborative Hub: A New Era for Muizenberg’s Post Office
- Growthpoint breaks ground on Tecoma Park, Cornubia, advancing its local logistics strategy
- Rosebank Mall adds Livo to its lifestyle line-up
- 166 sectional title units in the iconic Parktonian Hotel, located in the heart of Braamfontein, Johannesburg
eProperty News is a leading online commercial property marketplace serving the Southern African Investment, Office, Retail and Industrial property and allied sectors.