PPI records an unexpected 16.4% high

Statistics South Africa (StatsSA) reported Thursday, 26 June 2008, that month-on-month PPI, representing domestic output, stood at 4.9% compared to 2.1% previously.

Economists say the figure was well above expectations.

Figures are "shocking"

“It's a disaster and a shocking figure regardless of the iron and steel industries. Iron and steel is an essence of PPI and people still feel the effect,” T-Sec Economist Mike Schussler told BuaNews when reacting to the report.

Explaining the situation that South Africans currently face with the increase in the cost of living, Schussler said: “It's a bit of a problem - we are still going to get the electricity increases coming through on this, so it's unlikely we will see the PPI in single figures for some time to come.

Indicating difficult times ahead

“This is not the only figure we have to worry about. If you add this to the implied wholesale inflation rate of 16.8%, we now have two inflation figures out of four pointing to difficult times ahead.”

PPI is used to measure the rate at which prices are rising at producer level, as opposed to those at retail level which refers to the Consumer Price Index.

Stats SA attributed the rate in May to increases in the annual rate of change for basic metals (from -2.6% to 36.8%), and mining and quarrying (21% to 23%), which now has a higher weighting in the new index series.

Other increases came in products of petroleum and coal (from 33.6% to 33.9%), metal products (12.3% to 15.1%), non-electrical machinery and equipment (13.2% to 18.4%), and other manufacturers (3.35% to 5.4%.

Increased pressure = interest rate hike

Economist at Investec Annabel Bishop said the cost of doing business in South Africa has clearly accelerated sharply and today's figure adds substantially to the pressure for a further interest rate hike.

He attributed the other key driver of the month-on-month increase was higher oil prices.

“Today's higher than expected outcome will keep PPI inflation in double digits until the middle of next year and contribute to upward pressure on the CPIX.”

CPIX hike

On Wednesday StatsSA released May CPIX figures, excluding interest on mortgage bands (CPIX) which was recorded at 10.9% year-on-year (y/y).

The usual price increases in food, fuel and power as well as transport were attributed to the increase.

The CPIX inflation gauge, which the Reserve Bank uses as its inflation target, was up 1.1% month-on-month after it increased 1.6% month-on-month in April, StatsSA said.

Highest in over five years

This is the 14th month that CPIX inflation is outside its target range of 3 to 6% and it's highest in five and a half years.

The main drivers behind increased inflation were price increases in food, fuel and power, transport, household operation, education, medical care and health expenses, said Stats SA.

Interest rate D-day looms

The combined effect of increased inflation coupled with a rise in the production cost of goods does not bode well for the interest rate decision the Monetary Policy Committee's (MPC) will take in June 2008.

“We continue to forecast a 50bp [basis point] increase in interest rates at the August MPC meeting, given the steady upward progress of inflation and also that CPIX inflation is now only likely to regain target in 2010 [and temporarily at that], due to the planned significant, increase in the electricity tariffs,” said Bishop.

Speaking to BuaNews on the release of CPIX, Efficient Research economist, Fanie Joubert said the figure suggested that consumers were not out of the woods and instead facing tough times ahead.

Reserve Bank looking at a raise

He warned that with inflation at current levels, the Reserve Bank will have no option but to raise lending rates.

“It is evident from the figures that inflationary pressure is still a huge threat to the economy,” said Joubert.

Also reacting to the CPIX, ETM Economist George Glynos said it was a disappointing figure again despite it being a low measurement month.

“The figures confirm what Reserve Bank Governor Tito Mboweni has been saying about inflationary pressures being more broad based now.

“We are anticipating at least one more rate hike, perhaps even two, of a half a percent each,” he said.

Further decline expected

Economists expect June's figures to show a further deterioration when they are published next month because of this month's 50 cents per litre hike in petrol, and next month's will be even worse because the latest average monthly under recovery so far indicate the government-set petrol price increase next month will be 74 cents per litre.

Eskom's black cloud

Eskom's price hike negotiated with the regulator last week is another black cloud on the inflation horizon.

Economist say consumers who directly receive electricity from municipalities will have to fork out around 20% more on electricity in addition to the 12% increase that is in store in July.

With the prices of regularly purchased items such as food and petrol soaring, car and furniture sellers have had to cut their prices. Furniture is now nearly 3% cheaper than a year ago, and car prices have slipped 1%.

Article published courtesy of BuaNews