Pleasant consumer inflation surprises might be in the offing in view of the latest production price index (PPI) figures, Absa economist John Loos said on Wednesday.
He said this could speed up the tempo of interest rate cuts later in the year.
Year-on-year producer price inflation sank to 6,2% last month from 8,1% in January, Stats SA reported earlier in the day. Loos said this drop exceeded market expectations once again.
”It suggests we may be in for some positive surprises with regard to the consumer price index (CPI) figures in the coming months.”
CPIX — CPI excluding mortgage rates — inflation might subside sooner than expected to the upper end of the SA Reserve Bank’s target of a rate of between three and six percent this year and the next.
Loos said this boded well for interest rate cuts, although the bank’s monetary policy committee opted at its first quarterly meeting last week not to reduce rates.
”A series of good PPI figures, which will feed through to the CPIX, may hasten the rate of reduction of interest rates at the remaining three policy meetings,” Loos said.
Stats SA said a lower annual inflation rate for electrical machinery and apparatus, and for food at manufacturing helped to slow down last month’s PPI.
Other factors included decreases in the PPI for wood and wood products, for non-metallic mineral products, and for agricultural products.
The annual inflation rate for electrical machinery and apparatus showed the sharpest drop — from 13% in January to 5,6% last month. That of food at manufacturing stood at 14,1% last month, down from 18% in January. Stats SA said the annual increase of the PPI for locally produced commodities abated to 7,6%compared to 9,5% in January.
The PPI for imported goods also slowed down — from 4,6% in January to 2,6% last month. Loos said the declining trend underlined how severe the impact of the 2001 fall in rand was on the economy. High international food prices in 2002 made things worse.
The gradual departure of those effects from year-on-year figures saw PPI falling rapidly from its high base. Loos said the most likely scenario remained three 100 basis point reductions in interest rates during the year.
”(But) more of such positive (inflation) figures could raise the possibility of more aggressive cuts in rates this year,” he said. – Sapa