RISE
IN OIL PRICES THE MAIN CONTRIBUTOR TO PPI INFLATION
The y-o-y PPI inflation rate rose by 0.4%,
from 4.2% in August, to 4.6% in September. This is the highest PPI inflation rate since
February 2003. Even so, the increase was much in line with expectations, marginally higher
than our forecast, but marginally lower than the consensus. A significant increase in PPI
inflation had been forecast mainly on account of the steep increase in crude oil prices in
recent months. In the event, this is indeed what transpired in the PPI numbers, with a
sharp 10.2% m-o-m increase in the PPI for "other minerals", mainly crude oil.
This resulted in the y-o-y inflation rate for "other minerals" rising by 9.1%,
from 45.4% in August, to 54.5% in September. Bearing in mind the 3.18% weighting of crude
oil within the overall PPI, this 9.1% increase in crude oil inflation on its own
contributed towards 0.3% of the 0.4% increase in PPI inflation. Fortunately, the increase
in the PPI for products of petroleum and coal, at 3.0% m-o-m, was not as great as it has
been in recent months and this resulted in the y-o-y in PPI inflation rate for petroleum
and coal declining slightly, to 30.1% in September, from 33.1% in August. This helped to
subdue the overall increase in PPI inflation marginally. SHARP RISE IN NONFOOD AGRICULTURAL PRICES
The remaining 0.1% of the 0.4% rise in PPI
inflation, i.e. that portion of the rise in PPI inflation not attributable to oil, was
brought about by a substantial 4.2% m-o-m increase in the PPI for agriculture. Part of
this could be attributed to food, the main component of agricultural costs, but with other
agricultural costs also having a significant impact. The PPI for food at the agricultural
level rose by 3.2% m-o-m, resulting in the y-o-y food agricultural inflation rate rising
from -1.8% in August, to 0.7% in September. This is the first time in the past 15 months
that food inflation at the agricultural level has been positive. It reflects the impact of
rising agricultural futures prices in recent months arising out of a slight weakening in
the Rand/Dollar exchange-rate and fears of food shortages arising out of drought in the
summer rainfall regions. Higher international commodity prices of food have also had an
impact. Bearing in mind the 7.3% weighting of food agriculture within the overall PPI
basket, this 2.1% rise in agricultural food inflation contributed 0.15% of the increase in
PPI inflation. In addition, the 15.6% rise in the PPI for "other agriculture",
which caused the non-food agricultural inflation rate to rise by 11.3%, from -26.3% in
August, to -15.0% in September, contributed a further 0.04% to the increase in PPI
inflation (PPI weight for non-food agriculture 0.34%). Against this, the PPI for food at
the manufacturing level declined by -0.1%, resulting in the food manufacturing inflation
rate falling from 0.1% in August, to - 0.2% in September. With a weighting of 10.2% within
the overall PPI basket, this 0.3% decline in food manufacturing inflation lopped off 0.03%
or PPI inflation.
SHARP DECLINE IN
ELECTRICITY PRICES ALMOST IDENTICAL TO SEPTEMBER 2004
One of the big concerns that one had was the
possibility of some distortion in the PPI figures from changes in the price of
electricity. |
In
September 2004 the price of electricity declined by-28.0% m-o-m in line with the new
electricity pricing formula wherein prices in the winter months of June to August are
raised sharply, but are then reduced during the lower electricity demand months
thereafter. In the event, however, the m-o-m change in the price of electricity in
September this year was a similar -28.4%. As a consequence the electricity inflation rate
was barely changed and did not affect the PPI inflation outcome. "UNDERLYING" PPI RISES BY JUST
0.1% M-O-M
The most encouraging feature of the September
PPI numbers was the fact that if one excludes the uncontrollable oil and food-related
components, together with the price of electricity, all other producer prices posted very
little increase whatsoever. The "underlying" PPI (i.e. excluding food and
energy-related products) rose by a mere 0.1% m-o-m, the same as in September 2004. As a
consequence, the "underlying" PPI inflation rate remained virtually unchanged
for the second successive month, at 2.5%. What is encouraging about this outcome is that
it indicates that the feared second round price effects emanating from the steep increase
in fuel prices over the past year, did not materialise in September. Whilst some such
pressures might still emerge in due course, it is encouraging that the overall price level
remains as subdued as it is, especially bearing in mind that the Rand's value is no longer
appreciating on a y-o-y basis in such a way as to prevent import prices from falling.
FIGURES SUPPORT MOTION OF
NO RISE IN RATES THIS YEAR
Yesterday's CPI figures came out significantly
better than expected and deflated many analysts' fears of a rise in interest rates at the
December MPC meeting. In particular, Reserve Bank Governor Tito Mboweni, has been warning
in recent weeks of the need to tighten monetary policy in order to preempt second round
effects from higher fuel prices. The apparent absence of such effects in not only the CPI
numbers, but now also in the PPI numbers, suggests that there may be no need to panic
about such inflationary pressures just yet. Accordingly, one suspects that the publication
of these figures tends to negate the notion of a rate hike before year end. Instead, one
will need to assess the inflationary implications of movements in the Rand/Dollar
exchange-rate incoming months, as well as in oil prices, before determining whether or not
interest rates are likely to be increased. In line with our view that the Rand/Dollar
exchange-rate stands to depreciate over the next six months on account of the large
current-account deficit, we still view it as likely that interest rates will rise.
However, such an increase is only likely to materialise in the first half of next year and
quite possibly only in the 2nd qtr when the CPIX inflation rate will have reached a
temporary peak for statistical reasons. Psychologically, the may make it that much easier
than for the Reserve Bank to act then. |
