October 30, 2003

By Vernon Wessels

Johannesburg - The inflation rate on goods leaving factory gates is at its lowest in 58 years, just about sealing the case for further interest rate relief for indebted South Africans, according to data released yesterday by Statistics SA.

The annual producer price index was minus 1 percent in September compared with 0.2 percent in August and against expectations of 0.5 percent. This means that, overall, the prices paid by retailers to producers was lower last month than the same time last year.

Producer prices lead consumer prices by three to six months.
"It was the first annual deflation [in producer prices] since 1945," said Elaine van Heerden, a senior analyst at m Cubed Asset Management.

The plunge in producer inflation was driven by the appreciation of the rand against a weaker dollar.

The prices of imported commodities fell at an annual rate of 8 percent in September compared with a drop of 6.4 percent in August.

The cost of goods made locally increased at an annual rate of 1.7 percent last month from 2.6 percent in August.

The local producer inflation component was pushed lower by an adjustment in the electricity tariffs charged by Eskom as the electricity monopoly reverted to charging lower summer rates.  

Data released by Stats SA on Tuesday showed that the central bank's target measure of inflation - CPIX, headline inflation less mortgage rates - braked to 5.4 percent on an annual basis in September from 6.3 percent in August. It is now in the bank's 3 percent to 6 percent target range.

Craig Pheiffer, chief investment strategist at Sasfin Frankel Pollak Securities, said producer deflation would probably only last for another quarter as the benefits of a strong rand would have worked its way through the system. The margins of retailers that sell electronic imported goods might be squeezed should the companies drop their prices in line with their lower input costs.

However, margins could improve should retailers opt instead to keep prices unchanged, he said. The real spending power of consumers had increased significantly following the sharp fall in consumer inflation, and wage and salary increases of about 9 percent on average this year.

Four interest rate cuts totalling 500 basis points had also put more money in consumers' pockets, which might result in more goods being sold, Pheiffer said.

Household debt as a percentage of disposable income edged 50 basis points higher to 53.5 percent in the second quarter of this year.