Falling oil price puts brakes on inflation

THERE is hope for consumers and businesses as the petrol price drop has again slowed down factory floor inflation, and so interest rates may stay flat in the months ahead.

Annual producer inflation for final manufactured goods slowed marginally to 6.7 percent in October from 6.9 percent the previous month, against market expectations of 6.6 percent. This is the sixth consecutive month that producer inflation has fallen after peaking at 8.8 percent in April.

Kamilla Kaplan, an Investec economist, said aiding the deceleration in the annual producer price index (PPI) had been the decline in prices of industrial commodities, particularly crude oil prices.

Releasing the figures yesterday, Statistics SA said the main contributors to the annual rate were food products, beverages, tobacco products, metals, machinery, equipment, computing equipment as well as wood and paper products.

Azar Jammine, the chief economist at Econometrix, said the fall of PPI should result in consumer inflation being subdued and near to 5 percent, which is within the inflation target range of between 3 percent and 6 percent, over the next six months.

He said in light of this, he did not foresee any move on the part of the SA Reserve Bank to raise interest rates at its January monetary policy committee (MPC) meeting or even in the months beyond that.

Nedbank also expects the central bank to delay hiking interest rates given the collapse in the oil price and the slight firming in the trade-weighted rand. It forecasts that the Reserve Bank may hike rates again in the second half of 2015 when the US is expected to start hiking interest rates.

Jammine warned the one factor that might start reversing the declining trend of PPI was the fact that maize prices on agricultural futures markets had shot up, retracing almost half of the declines recorded earlier in the year.

In addition, Jammine added that the Reserve Bank had stated that it remained concerned about state-administered price increases, especially the cost of electricity in the longer term, as well as the magnitude of wage increases.

Turning back to the oil price, Kaplan said since June, the Brent crude price had declined over 30 percent, to trade at fouryear lows, on a combination of US dollar appreciation, oversupply and the deterioration in global growth prospects.

In the latest development, Gulf oil producers led by Saudi Arabia won the case yesterday for keeping Opec output unchanged, overriding calls from poorer members for action to halt a slide in crude prices, Reuters reported.

Benchmark Brent crude fell $3 (R33) to its lowest since September 2010, at under $75 a barrel, on expectations that huge global oversupply will build up in coming months. Opec also decided to meet next on June 5.

Nedbank said producer inflation was likely to continue declining in the coming months as global and energy prices moderate. However, it said the volatility of the rand did add uncertainty to the inflation trajectory.

Jammine said one could not set aside the possibility that the rand could resume a significant depreciating trend in the early part of 2015.

Kaplan said the rand, along with other emerging market currencies, had derived some support from recent international global developments. These pertain to monetary policy easing in China, prospects for further monetary policy accommodation in the euro zone and the recent raft of US macroeconomic data that missed market expectations.

“A more resilient currency will act to further dampen rand-denominated commodity price growth,” Kaplan said.