Prices drop less than expected

FACTORY gate prices fell by a less-than-expected 1,2% year-on-year last month and rose compared with October, suggesting the deflationary trend could be easing.

FACTORY gate prices fell by a less-than-expected 1,2% year-on-year last month and rose compared with October, suggesting the deflationary trend could be easing.

Stats SA said yesterday producer price inflation, representing domestic output, fell for the seventh consecutive month, but the rate of decline slowed from October's 3,3% drop.

Prices increased by 0,8% compared with the previous month.

Economists polled by Reuters last week forecast that producer prices had fallen by 1,8% year-on-year and increased by 0,2% on a monthly basis.

The figures show price pressure remains fairly subdued in Africa's biggest economy, following a slower-than-expected 5,8% year-on-year number for consumer price inflation for November.

But analysts warn producer prices could return to inflation soon and that CPI may accelerate back through the top end of the central bank's 3 to 6% target range, partly on base effects with inflation having eased sharply towards the end of 2008 and early 2009.

"The high food and fuel prices we saw towards the end of last year started coming down, therefore we're getting that base effect reversal," Absa Capital macro strategist Jeffrey Schultz said.

"(That) is obviously going to see the deflationary trend in PPI slow quite dramatically over the next couple of months and probably jump back into inflationary territory in the first month or two of 2010."

Economists said the data was unlikely to prompt the central bank into adjusting interest rates, taking away some of the argument for a cut at the next policy meeting next month.

Expected big increases in power costs in 2010 are seen as the main risk to the inflation outlook and could see the repo rate rise from its current 7% towards the end of 2010.

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

"For similar reasons the ascent in the PPI will likely be particularly sharp next year, moving to above 6% by the end of 2010, not least due to higher electricity tariffs."

The Reserve Bank cut the repo rate by 5 percentage points between December last year and August to help lift the economy out of recession, unwinding increases in the two years to June 2008.

The economy returned to growth in the third quarter and most analysts see a relatively strong rebound in 2010.

The Reserve Bank is under severe pressure from trade union allies of the ruling ANC to cut interest rates and has agreed to debate its focus on inflation.

The unions want it to take growth and jobs more into account when making policy decisions.

Stats SA said exported commodities inflation stood at -11,9% year-on-year in November compared with -13,1% the month before, while imported commodities inflation was at -5,7% year-on-year from -10,2% previously. - Reuters

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