PPI data ‘does not bode well for consumers’

South Africa’s producer price index (PPI) rose by 11,8% year-on-year in March from 11,2% in February, Statistics South Africa (Stats SA) data on Thursday showed.

The PPI rose by 2% on a monthly basis after February’s monthly increase of 1,3%.

PPI was expected to be at 10,9% year-on-year, a survey by I-Net Bridge had found. Forecasts ranged from 10,1% to 11,5%, while PPI was at 10,3% a year ago, providing a high base.

Stats SA attributed the rate in March to increases in the annual rate of change for mining and quarrying (15,3% to 17,1%).

However, this increase was partially counteracted by decreases in the annual rates of change for agricultural products (from 19,5% to 16,6%) and basic metals (from -0,2% to -1,3%).

The jump into double digits in October 2006 was the first double-digit increase since December 2002.

The annual average for PPI in 2007 was 10% from the 7,7% recorded in 2006. The annual average for PPI in 2005 was just 3,1%. PPI was at an average of 0,6% in 2004, 1,7% in 2003 and 14,2% in 2002.

The 2004 average was the lowest since 1959, when there was no change in producer prices. The lowest annual consumer inflation in the post-1945 period was also in 1959 at 1,1%.

New weightings were introduced in the January 2008 data, but with no backdating.

Dennis Dykes, economist at Nedbank, said the PPI data is “worse than expected, and comes on the back of a bad CPIX number yesterday [Wednesday]”.

“Everything now points to at least another interest-rate hike in June, but going forward it will depend on what happens with electricity prices. It’s certainly not a good number,” he said.

Dawie Roodt, economist at Efficient Group, commented: “I am afraid all these price increases from producers will start filtering to consumers. This does not bode well for consumers going forward. While we have pencilled one more rate hike during this cycle, maybe we should brace ourselves for a further 100-basis-point rate hike.”

Said Razia Khan, economist at Standard Chartered Bank: “Another hugely strong South African inflation release, and one that will reinforce market expectations of the need for further South African Reserve Bank tightening.

“PPI surges a whole 2% month-on-month, suggesting that pipeline pressures remain strong, and we are unlikely to see any let-up when it comes to the pressure on consumer inflation either.

“Given what we already know of further food- and fuel-related pressures, PPI is likely to remain in double digits, and accelerate further, in the months ahead — despite an already high base.

The SARB now faces a real dilemma, said Khan. “No single month’s inflation print is going to determine policy, which must consider the outlook for inflation on an 18-to-24-month horizon. There is also an argument that earlier interest-rate tightening must still run its course.

“It is undeniable that the economy is already slowing, albeit from enormously buoyant levels previously. But in the face of this sort of price pressure, can the SARB take any chances with the inflation outlook?

“For now, we believe the SARB is still monitoring the real economy data as it comes in, hence our central scenario of no more tightening. But pressure for a June rate move, and perhaps even more, is growing.” — I-Net Bridge

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