Inflation threat rears its head

Johannesburg - While improving sales and new orders have boosted trading in the economy, they are also creating fertile ground for inflation to rear its head.

That's according to the South African Chamber of Commerce and Industry's (Sacci's) trade conditions survey for February, released on Wednesday, which saw trade conditions rise from 44 index points in January to 54 in February. Above 50 index points is positive.

"Sales and new orders were mainly responsible for the positive trade conditions, as reflected by the TAI [Trade Activity Index]," said Sacci in a statement.

According to the business chamber, the TAI sub-index on (non-retail) sales volumes increased by 15 index points in February after declining by 14 index points to 45 in December 2009, improving slightly to 46 points in January 2010. Non-retail sales usually peak in November and experience a dip in December.

"Trade activity is picking up nicely," said Econometrix economist George Glynos. "Demand is steadily improving."

However, Glynos said the survey has also pointed out that inflation is gathering momentum. "It is concerning to see the input prices expanding," he said, pointing to the index on selling prices which ticked up to 54 in February (from 51 the month before). The input price index has also increased by three points to 61 in February.

This indicates that inflationary pressures are mounting particularly from input costs such as diesel, which is now 15.1% higher than a year ago. Substantial direct and indirect electricity cost effects will add to inflationary pressure in months to come, according to Sacci.

Glynos also noted the inventory index increased marginally to 47 index points, suggesting short-term uncertainty surrounding the strength of the economic recovery.

Sacci said current employment conditions in the trade environment improved strongly in February 2010 as trade conditions, especially sales, increased considerably.

The index rose by seven points to 48 in February, suggesting fewer lay-offs. The employment prospects index increased to 57 in February after measuring 55 in January, but Glynos warned actual activity levels are more indicative of the economy's potential growth than trade expectations.

Positive expectations factor on the index in the effect of the 2010 Fifa World Cup and an anticipated stronger economic recovery in the second half of the year.

- Fin24.com