January 29, 2004

By Vernon Wessels

Johannesburg - Producer prices fell at a slower rate in December than November, further diminishing the possibility of an interest rate cut next month, data released by Statistics SA showed yesterday.

The producer price index (PPI) fell 1.8 percent last month, meeting expectations. Its 2.5 percent decline in November was its sharpest drop since the index was introduced in the 1960s.

December's fall made it the fourth consecutive monthly decline in producer prices, which meant the index averaged 1.7 percent for the year, much lower than the 14.2 percent in 2002 and 8.4 percent in 2001.

The fall in producer prices was again driven by the stronger rand, with the imported component of the index falling at an annual rate of 8.2 percent from a 9.6 percent drop the month before.

The prices of locally produced goods rose 0.6 percent in December from 0.2 percent in November.

Most economists expect that the bottom is near for both the PPI and consumer inflation, which follows producer prices by between three and six months. They believe prices may start ticking slightly higher.

It is not, however, expected that the Reserve Bank's targeted measure of inflation, CPIX (consumer inflation less mortgages) will breach the upper end of its 3 percent to 6 percent band this year, although it may test this level early next year. In December CPIX fell to a 40-year low of 4 percent, from 4.3 percent in November. 

This will discourage further rate cuts, given that domestic demand is exceptionally strong, when the Reserve Bank meets for its monetary policy committee meeting on February 25 and 26.

Food prices, which have a 25 percent weighting in the CPIX, are moving higher, while oil prices have remained above $30 a barrel. Food prices dropped considerably last year following a sharp spike in 2002. This means inflation figures will come off a lower base this year.

Arthur Kamp, an economist at HSBC, said the upward pressure in December came from domestic food prices, such as meat, fruit and grain, although this was countered by lower oil input costs and electricity prices.

"We must not lose sight that, overall, 2004 will be a good year for inflation. There may be some progress on administered prices and perhaps also in drug prices."