Inflation outlook brightens

The South African economy appears to be pulling itself out of the problematic inflation environment that we have been struggling under recently. The effects of inflation targeting seem to be paying dividends finally. Consumer inflation is almost within the Reserve Bank's target range of 3 - 6 percent and Producer Price Inflation (PPI) is contracting. PPI is the measure of how quick making things gets more expensive and at the moment things are actually getting cheaper to make.

• Producer Price Inflation is at -3.7%
• Electricity production more expensive by +1.6%
• Petrol and coal products down 2.2%

Inflation starts with the raw materials. These are then manufactured. PPI is a measure of the costs of manufacturing, an inflation at the factory gates measure. The products are then sold to retailers who then sell them onto the consumer. Now according to the figures it is getting cheaper to make most products and there is actually deflation at the factory gates. In theory these savings should then be passed onto the retailers who would in turn pass them onto you the consumer.

In reality the retailers do not always pass these savings onto you the consumer. Consumer inflation is sitting at 6.1% meaning prices are going up by 6.1% but the cost of producing those goods is going down at 3.7%. While there is a time lag between when the raw materials for a product are processed into the finished goods which are available in the shops there should have been more downward pressure on consumer inflation. The PPI figures are positive but whether consumers will see the benefit is a debatable point. Plan your budget on consumer rather than producer inflation.