Johannesburg - Statistics South Africa said on Thursday producer inflation, which represents domestic output, quickened to 8.9% year-on-year (y/y) in July from 7.4% in June.
The market was expecting the producer price index (PPI) to pick up to 7.8% y/y and slow to 1.8% on a monthly basis.
Analysis comment Freddie Mitchell, economist, Efficient Group:
“It is quite higher than expected. The market expectation was 7.8% and that was one of the highest expectations. Coming at 8.9%, it is greatly above that expectation.
“It is telling us that there is inflation coming through in the economy, and we are going to see it somehow in the consumer inflation.
“Looking at these figures we know the Reserve Bank is going to have a tough task in deciding what to do, given the uncertainty in international markets.”
Salomi Odendaal, economist, Citadel :
“It is higher that we expected and it indicates that there are some pressures that could come through to headline CPI (consumer price index) inflation.
“We don’t expect the Reserve Bank to cut rates at the moment. The global situation is very uncertain and unless there are some unforeseen circumstances, we expect them to keep rates steady.”
Christie Viljoen, economist, NKC Independent Economists:
“Electricity and food prices and labour costs all went up, so I’m not surprised that it’s above expectations and imported prices were up.
“With food commodities going up, it means CPI will be affected and so consumer inflation will continue rising for the rest of the year - it means any talk of an interest rate cut is wishful thinking.”
Colen Garrow, economist, Brait:
“It’s quite high but I don’t think it changes the interest rates outlook.
“The focus is all on GDP (gross domestic product) and what we need to do to prevent a recession. Inflation will go up, but when the deflationary effects of a recession start to have an impact focus will still be on cutting rates.”
Market reaction The rand was trading at 7.2450 against the dollar at 09:56 GMT from 7.2574 before the data was released at 09:30 GMT. The yield on the 2015 bond went up to 6.75% from 6.735% beforehand.
Background - The CPI rose to 5.3% y/y in July from 5.0% in June, slightly above forecasts of 5.2%, in line with the central bank’s forecast that it will marginally breach the 3% to 6% target band by year-end.
- The PPI basket is however dominated by commodities, weakening the link with CPI.
- The rise in global commodity prices and seasonal electricity tariff increases weighs on producer prices.
- The central bank has left its repo rate unchanged at 5.5% so far this year, after reducing it by 650 basis points between end-2008 and end-2010 and the market is divided on when rates will be cut again.