PPI inflation drops to -3.0% in May 2009
The PPI continued its downward trend with a deflation of 3.0% for May 2009 as compared to the PPI figures for May 2008. This is a surprising 5.9 percentage points lower than the annual rate of change in PPI for April 2009.
The figure for May 2009 is good; the drop was more than what was expected. However, we have to remember that the PPI figures in 2008 were very high, so we’re coming from a high base.
The main contributors to the drop were decreases in the annual rates of change for petroleum and coal products, mining activities and basic metals.
What does the PPI figure for May 2009 mean?
The PPI figures for May 2009 mean that producers in South Africa are operating in a deflationary environment for the first time since 2003.
The average South African “producer of commodities” (i.e. companies that produce things that are used by everyday people) paid 3.0% less in May 2009 for the basic goods and services they need to produce things, than they did in May 2008.
How do the PPI figures affect the chances for a rate cut?
The latest PPI figures for May 2009 support a rate cut, because it shows that inflationary pressures came down significantly over the last year.
Demand for both domestic and international commodities is down. Demand should remain under pressure throughout the next year or two, so PPI inflationary pressures are unlikely to return soon.
That said, the oil price is back at US$ 70 after trading at nearly US$ 40 not so long ago and Eskom are making noises about a 34% hike in electricity tariffs.
I expect the SARB‘s monetary policy committee to announce a 50 basis point rate cut when they meet later today. If economic policy in South Africa remains unchanged, I suspect that this will be the last change to the repo rate for 2009.
