Price surge raises new fears over inflation

CIPS 30 September 2011

Price surge raises new fears over inflation

Bank may keep rates steady due to continuing focus on growth

PRICES at South African factories, mines and farms rose at their fastest pace in more than two and a half years last month, fuelling concern that the outlook for consumer inflation may deteriorate.

But given its focus on faltering economic growth, the Reserve Bank is unlikely to raise interest rates even if price pressures are stronger than it expects.

Producer inflation surged by 9,6% compared with August last year, up from an annual rate of 8,9% in July, figures from Statistics SA showed yesterday. That was the biggest increase since December 2008, when it rose by 11%, and was well above market consensus forecasts of 9%.

Price increases for electricity, mineral products, and food at both the agricultural and manufacturing level were the main drivers of the annual rise in the producer price index (PPI).

"Higher then expected producer price figures continue to point to an upward trajectory for inflation," Absa Capital economist Jeffrey Schultz said.

But the Reserve Bank was likely to "remain tolerant" of the price pressures given its heightened concern over the outlook for both the global and domestic economies, he added.

Consumer inflation is set to breach its official 3%- 6% target late this year.

The Bank believes it will subside within the range by the second quarter of next year.

Given the prominent weighting which commodity prices have in the PPI, it is not as relevant to consumer inflation since its basket of goods and services was overhauled three years ago.

But some of its components do feed directly into the retail market — notably food prices, which were one of the main drivers of producer inflation last month.

"The rise in food price inflation at the agricultural and manufactured level points to higher food price inflation at the retail level in the coming months," Investec economist Kgotso Radira said.

Strength in the rand during the first half helped to cushion SA from rising global food prices, but the currency’s recent sharp depreciation meant this would no longer be the case, Mr Radira said.

Food prices at the agricultural level rose by an annual rate of 3,6% and at the manufactured level, by 7,2%.

During the month itself the PPI rose by 1%.

"Clearly, the high PPI reading worsens the outlook for consumer inflation," Stanlib economist Kevin Lings said.

Higher petrol prices — which have risen by 16% so far this year — also helped to fan producer inflation last month.

Oil prices are receding as the global economic downturn deepens, but if weakness in the rand persists, it is likely to more than offset that benign trend.

Econometrix economist Tony Twine warned yesterday that the price of petrol was likely to rise by at least 33c/l next Wednesday.

Nedbank economist Carmen Altenkirch pointed out that lower commodity prices and subdued global growth would help to curb producer inflation next year.

"Deteriorating economic prospects will make businesses, both locally and abroad, reluctant to invest in additional capacity. This should contain price increases of manufactured goods as well as machinery," Ms Altenkirch said. "Producer and consumer inflation will continue to edge higher in the coming months. But in the short term, the Bank focus will be on how the crisis in the euro zone develops as well as the health of the global economy, and how this might impact domestic growth prospects."


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