Declining PPI to end soon

Johannesburg - Factory gate prices in South Africa continued to decline in November, but forecasts point to a turnaround to rising prices in early 2010.

The producer price index (PPI) fell 1.2% in November compared to the same month last year, lower than economists' expectations for a 1.9% contraction during the period. PPI fell 3.3% year-on-year in October. This is according to Statistics South Africa data released on Thursday.

The key reason why PPI declined at a slower rate in November compared to the previous month was renewed activity in the mining and resources sector. Commodity prices have increased steadily over the past few months.

However, interest in commodities was countered by still-depressed conditions in many parts of the South African economy where industrial activity is at low points. One example is the construction sector, where there has been little increase in building material prices.

Economists expect PPI to start showing some positive, though muted, growth next year.

"Weak global and domestic demand and a strong rand are likely to support the generally positive outlook for producer prices," said Nedbank economist Carmen Altenkirch.

"Key risks to the outlook is the possible 35% Eskom electricity tariff hike as well as further gains in commodity prices," she said.

Meanwhile, the benign inflation figures released this week are unlikely to push the South African Reserve Bank towards cutting interest rates in the next few months, according to economists polled by I-Net Bridge.

"An additional rate cut would be beneficial, not least to boost confidence, but consumer inflation will rise back above target in the next few months due to seasonal and base effects," said Annabel Bishop, an economist at Investec.

Consumer inflation rose 5.8% in November compared to the same month in 2008 and was virtually unchanged from October's 5.9% year-on-year reading, according to Stats SA data released on Tuesday.

- Fin24.com