Prices of food leaving farms fall, raising hopes that the trend will reach shelves
July 31, 2009
By Ethel Hazelhurst
Prices of goods leaving farms, factories and mines continue to fall, raising hopes that the trend will eventually feed through to supermarket shelves.
Statistics SA reported yesterday that the producer price index (PPI) plunged 4.1 percent on an annual basis last month after falling 3 percent year on year in May.
Investec chief economist Annabel Bishop said it was "the largest on record, mirroring the severity of the global and local recessions".
The fall exceeded expectations of minus 3.3 percent in a Bloomberg poll and minus 3.8 percent in a Reuters poll.
A key factor in the overall outcome was a 35 percent fall in prices of petrol and coal products and a 6.5 percent fall in food prices at the agricultural level. There were also large falls in a range of metal products.
Citi economist Jean-Francois Mercier attributed the fall in prices of oil and metal products largely to base effects - in other words sharp increases a year ago created a high base against which current prices are measured. However, he said: "Most components of the index are showing a genuine moderation in prices, in particular in the food sector, which bodes well for lower food inflation at the consumer level."
One component of the index that continued to rise sharply was electricity, which saw an annual increase of 23.1 percent. On a monthly basis it rose even more - by 43.6 percent.
Standard Bank economist Danelee Van Dyk attributed the monthly jump to "the seasonal switch to winter electricity tariff pricing, which is bound to get a further lift (this month) when Eskom's interim electricity tariff rise of 31.3 percent kicks in. The actual increase will probably be higher in July, owing to spillover effects of higher winter tariff charges."
Meanwhile, confirmation of the deflationary trend is good news for consumers. Though the effect is blunted by historic costs in the production line, some of the benefits should soon be seen in retail prices. And lower consumer inflation increases the probability of a further cut in interest rates.
The Reserve Bank's monetary policy committee will decide in two weeks whether to cut the bank's official repo rate further from 7.5 percent, after a 4.5 percentage point cut since December. Governor Tito Mboweni said last month that further significant cuts were unlikely against the backdrop of sticky consumer inflation.
PPI inflation fell rapidly from a peak of 19.1 percent in August last year to single digits by the start of the year and less than 3 percent in April. But consumer inflation, which traditionally lags it, has responded slowly, falling from a peak of 13.7 percent in August to 6.9 percent last month, within reach of the ceiling of the Reserve Bank's 3 percent to 6 percent target range.
Mercier said the PPI and consumer inflation figures, as well as earlier figures that showed a loss of 267 000 jobs in the second quarter, were unlikely to bring another rate cut next month. Van Dyk also predicted no move.
However, Bishop forecast a 50 basis point cut. She said second-quarter gross domestic product data were likely to show a 4.2 percent contraction. The figure was a quarterly change adjusted for seasonal factors and inflation and multiplied by four. This follows a shrinkage exceeding 6 percent in the first quarter and nearly 2 percent in the quarter before.
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