Prices in SA 'cooling down'

Johannesburg - The surprisingly low producer inflation reading on Thursday combined with a lower-than-expected CPI on Wednesday indicate that the upper turning point in South Africa's inflation cycle was passed in August.

This is because analysts feel that both of these measures are due to continue easing throughout 2009.

"This should provide some welcome relief to the economy, following the serious upwards inflation cycle we experienced from around 2004 (PPI actually experienced deflation during the fourth quarter of 2003). The latest inflation data, coupled with the lower-than-expected rise in private credit demand (September PSCE: 16.4% y/y), makes it very unlikely that we will see more rate hikes in the current cycle and we maintain our view that we could start talking about possible rate cuts from the second quarter of 2009," says Fanie Joubert, economist from Efficient Group.

However, the new definition and measure of PPI, which was introduced this year, does imply increased volatility month-by-month given the inclusion of many more commodity price changes, which are significant in weight.

But chief economist from Stanlib, Kevin Lings, also feels a peak was reached in August despite this.

"The latest PPI inflation reading is the lowest since April 2008. The August reading of 19.1% year-on-year (y/y) now appears to have been the peak," he says.

The better-than-expected outcome in September was mainly due to a large decrease in electricity tariffs - which is seasonal and expected - as well as a fall-off in metal and oil prices.

Explains Lings: "Electricity prices fell by a substantial 29.1% month-on-month (m/m). This is a seasonal decline and reflects the move from winter to summer tariffs. On a year-on-year basis, electricity prices are still up a significant 29.9%. The decrease in September subtracted a massive 2.3 percentage points from the monthly change in PPI."

"Mining inflation fell by a very encouraging 6.0% m/m in September, subtracting 1.2 percentage points from the monthly change in PPI. This was caused by lower coal, oil, and metal ores prices, which reflects the sharp slowdown in world economy and fall-off in international commodity prices. These prices were falling prior to the rand coming under extreme pressure.

Interest rate respite

"Once again these price trends should provide positive support for the outlook for PPI inflation in the months, depending on what happens to the rand. As at yesterday the rand oil price was a massive 43% below its recent peak and 2.5% below the level that prevailed at the start of the year," concludes Lings.

Today's data showed September PPI at 16% y/y, well and truly trumping forecasts of 18.1%.

Slowing world and local economies will have the beneficial effect of lowering inflation in South Africa and providing respite on the interest rate front. However, the benefits stop there. End I-Net Bridge