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South Africa: No Respite From Inflation in Sight
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Business Day (Johannesburg)
25 April 2008
Posted to the web 25 April 2008
Mariam Isa
Johannesburg
FACTORY, mining and farm prices jumped by an annual rate of 11,8% last month, accelerating from a revised 11,3% in February and suggesting there would be little respite from inflation in the next few months.
The increase in SA's producer price index (PPI) was the biggest in 10 months and defied forecasts for a slowdown, hardening the case for another interest rate hike at the Reserve Bank's policy meeting in June.
"We are being inundated by an avalanche of inflationary pressures, for which there is no immediate resolution but to further tighten monetary policy," said Standard Bank economist Danelee van Dyk. "Given the Bank's concern about second round effects in retail prices stemming from input costs at the factory gate, we expect an increase in interest rates in June," Van Dyk said.
Banking shares fell, while government bonds and the rand wobbled as markets priced in the risk that interest rates would rise a third time this year when the Bank's monetary policy committee meets in August.
"The headline PPI number suggests there is little hope of a respite in consumer inflation in the short term," said Absa Capital economist Monale Ratsoma.
"We expect it to continue to point to upward pipeline consumer price pressures."
Figures released this week showed that SA's targeted CPIX inflation gauge rose by 10,1% last month -- a new five-year peak -- and Ratsoma said the PPI data pointed to a rise of similar magnitude this month.
The increase in producer prices was driven mainly by a leap in the cost of minerals and chemicals, which rose by an annual rate of 17,1% in March from 15,3% in February -- in line with global trends.
It also reflected revisions to the PPI index this year, which doubled the weight of minerals to more than 19% and included gold for the first time. That has helped weaken the link between producer and consumer prices, making them a bit less relevant to monetary policy decisions.
"While we do not think that the Bank will attach a major weight to the data, the overall mix of negative consumer and producer prices and the risk they will feed through to private sector price expectations significantly raises the risk of additional rate hikes," Citigroup's Jean-Francois Mercier said.
Yields on government bonds, moving the opposite direction to prices, have climbed 20 basis points in the past two days, reflecting views that rates will rise.
Yesterday banking shares were also knocked, with Absa, the country's biggest retail bank, falling 3,98% to R96,50 while Standard Bank, SA's biggest lender by assets and earnings, fell 2,56 % to R87,96.
Bank profit is sensitive to higher interest rates, which push up the cost of debt, leading to a greater risk of defaults and slower consumer borrowing.
Consumer spending -- the economy's main growth engine -- has already slowed sharply in response to a cumulative 4,5 percentage point increase in lending rates since June 2006.
Import prices for producers quickened to an annual rate of 15,9% last month from 14,9% in February. Export prices slowed to 8,3% from 8,5%.
Agricultural prices slowed to an annual 16,6% from 19,5% in February, the lowest since April 2006. However, this was mainly due to a technical base effect after a sharp rise in the same month last year.
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Additional reporting by Regis Nyamakanga.
Everybody acts as if this is something new.Take it from me,it's not.The manner in which it is calculated has and this shows a larger number. I have owned my own small businesses, prices have always increased, since 2002 substantialy,why did'nt anybody say anything in 2003 or 2004 at least. Different formula that's right,go to the top of the class.It is unwise to hide the correct figures anymore because now its global and many more eyes will be watching inflation data,to high a risk of being caught out.
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