South African producer prices for all commodities fell by 1,8% in the 12 months to the end of December from a 2,5% decline for the 12 months to the end of November, Statistics South Africa said on Wednesday. On the month, there was no change in December on an actual unadjusted basis from a drop of 0,3% in November.
South Africa’s December producer price index (PPI) had been expected to continue the year-on-year (y/y) deflation trend after September 2003 posted the first y/y deflation since World War II.
The median forecast for December was for a y/y decline of -1,8% from November’s post-1945 record low decline of -2,5% y/y. The range was from -3% y/y to -1,5% y/y.
The following are economists’ reactions to the data:
Dawie Roodt, chief economist at Efficient Group: “The figure is just about spot-on with what we expected. It is pretty much a non-event number — I don’t think the markets will react to this.”
Mike Schussler, economist at Tradek: “I think this was very much an expected figure. Looking forward it will be good for our inflation, which is not too much of the problem at the moment. There is now a good possibility for further interest rates cuts in the months ahead.”
Annabel Bishop, economist at Investec: “The PPI deflation figure was on the back of rand strength and base effects. We do not believe PPI will fall much further and expect inflation (in contrast to the current deflation) to be recorded at the wholesale level by end of Q1.04 [the first quarter of 2004]. The outcome is supportive of further easing in CPIX inflation in Q1.04. However, we still believe that the interest rate cycle has bottomed in South Africa and that the next move in the prime lending rate will be a 0,5% hike in Q1.05.”
Johan Rossouw, chief economist at Vector Securities: “It was in line with market expectations so as such it wasn’t really a big surprise. Even though there was no month-on-month index change, there was a slight headline change because of the low base of calculations. On the whole I think we are on the way up.”
Chris Hart, economist at Absa: “The PPI figure reflects that we have zero inflation in South Africa and that the tendency remains for continued deflation. I still see a 50 basis-point cut in the repo rate in February. However, longer term the fall in the rand and the potential for higher food prices is a threat to local interest rates. The monetary policy response to the rand and the food prices could be
to end the interest rate cycle. In the second half of 2004, there is a possibility of a repo rate hike.”
Rejane Woodruffe, economist at Metropolitan Asset Managers: “The PPI numbers were relatively good ones, like the CPI yesterday [Tuesday], but I believe this is really the last of the good news on inflation. The data will start rising from here. We might still see the CPI data being helped by previously lower PPI due to the time lag involved in the feed through from producer prices to consumer prices, but from April we expect the CPI to start to rise.”
Jac Laubscher, group economist at Sanlam: “I believe all the inflation data must be seen in the wider context of inflation starting to bottom out. The slowing in the December PPI data — showing less of a decline than in November — shows that the declining trend is turning. And we would expect the PPI data to lead the CPI due to the lag involved in the feed through to consumer prices. From here on in we should see a gradual rising trend emerge, encouraged by the moderate weakening of the rand (which is more of a fundamental factor) and also by rising oil prices (which is more of a temporary factor).
“Also, buoyant consumer demand means that companies — across the supply chain, from producers to retailers — should have more pricing power in 2004 than they did last year, which could contribute to inflationary pressures. The data doesn’t change our view of no further rate cuts in 2004, and interest rate increasing beginning from the first half of 2005, with the risk of these being earlier depending on the behavior of the rand and food prices.” — I-Net Bridge