November 27, 2003

By Vernon Wessels

Johannesburg - The prices of goods leaving factory gates declined for the second consecutive month in October, as the stronger rand caused the cost of imported products to drop and forced local producers to compete by lowering their charges to retailers, data released yesterday by Statistics SA showed.

The producer price index (PPI) fell by an annual 1.8 percent last month, after declining by 1 percent in September.
Market analysts polled by Bloomberg News expected PPI to fall by 1.6 percent.

It was the lowest PPI figure since the index replaced the wholesale price index in 1960, which last fell into deflationary territory in the early 1940s, officials at Stats SA said.

Producer prices, which led consumer prices by three to six months, could fall even further if the rand remained strong, said Marisa Fassler, an economist at JP Morgan.

The rand bolted to a fresh high yesterday as it briefly touched R6.3961 to the dollar, its best level since March 2000.
By 7.30pm it was trading at R6.4070.

The better-than-expected producer inflation numbers follow the release this week of rosy consumer inflation data and anaemic growth figures, which showed the stronger rand hampering the economy's ability to grow.

Four interest rate cuts totalling 500 basis points were, however, starting to stimulate the demand side of the economy but did little to lift the agricultural and manufacturing sectors, which were both trapped in recession as overall gross domestic product growth measured only 1.1 percent in the third quarter.

Annual imported producer inflation plunged 9 percent in October from 8 percent in September, while the rate of increase in the prices of domestic products slowed to an annual 1 percent in October from 1.7 percent the month before.

Measured on a month-on-month basis, producer prices declined 0.1 percent following a 2.2 percent drop in the costs for television, radio and communication equipment; a 2 percent decline in optical equipment; a 1.3 percent fall in office, accounting and computing machinery; and a decrease of 1.5 percent in basic metals.  

Domestic food prices put some upward pressure on the monthly inflation numbers, with a 2.3 percent month-on-month rise in the index for food at agriculture level as fruit prices rose 10.2 percent, meat prices climbed 5.7 percent and oil seeds rose 4.6 percent.

Some of this was offset by a 0.2 percent month-on-month decline in the prices of grain, a 1.3 percent fall in sugar cane prices and a 2.5 percent drop in vegetables and dried beans.
"The sharp decline in producer inflation should continue to be a powerful driver of disinflation at the consumer level in the months ahead," Fassler said.

"This should make the Reserve Bank more comfortable about the inflation outlook in 2004 and allow for further rate cuts. We continue to expect interest rates to decline by 100 basis points in December and 50 basis points in February."

Data released by Stats SA on Tuesday showed that the central bank's targeted measure of inflation - CPIX, or headline inflation less mortgage rates - braked to 4.4 percent on an annual basis last month from 5.4 percent the month before - almost in the middle of the 3 percent to 6 percent target range.

Ameesha Chagan, a fixed interest portfolio manager at Abvest Associates, said producer prices could wallow in deflation for another two to three months before ticking upwards.

The rand would continue to support lower prices, she said.

"If the rand manages to close below R6.50 against the dollar this week we may see it strengthen beyond R6.25 a dollar by the end of the year," Chagan said.

"I also believe we may see a strong rand early next year" because of high commodity prices, she said.