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PPI adds pressure to cut interest rates
THE ECONOMY
PRESSURE on the Reserve Bank to cut interest rates mounted once again after the Central Statistical Service released better-than-expected producer inflation figures this week. Changes, measured by a rise or fall in the Producer Price Index, usually signal falling consumer inflation a few months in advance. Inflation is one of the key criteria examined by the Bank in its assessment of monetary policy and all the price indicators appear to be pointing in the right direction. Consumer inflation recently retreated from a high of 9.9% in April this year. The trend in producer price inflation is even more encouraging. The June PPI showed an increase of 7.5% compared with 8.4% in May. The main reason for the sharper than expected fall was the fact that producer prices actually declined on a monthly basis (between May and June this year) by 0.2%. A large contribution to lower producer prices came from imported producer goods. The imported component of the PPI dropped by 1.4% on a monthly basis and by 4.1% year-on-year, its lowest level since April 1996. Locally produced goods rose by 8.4% between June 1996 and June this year compared with an annual rise of 8.9% in May. Johan Rossouw, economist at stockbrokers Huysamer Stals, expects the PPI to show a further drop to 7% in July although this could prove to be a forecast slightly on the optimistic side given the July weakness of the rand. More important though is Rossouw's analysis of the underlying performance of the PPI. This he achieves by averaging the PPI's quarterly and seasonally adjusted yearly growth rates vs the normal producer inflation rate. The trend - as depicted in the graph - indicates a steady fall from its peak late last year. It bodes well for consumer prices which had in any case already embarked on a downward course. In April inflation peaked at 9.9% but has since decreased by about one percentage point.
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