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PPI quickens to 5.2% in October

Nov 29 2012 12:51 Reuters

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Johannesburg - South African producer inflation quickened more than expected to 5.2% year-on-year in October from 4.2% in September, Statistics South Africa said on Thursday.  

On a month-on-month basis, prices at the factory gate rose  by 0.6% in October after a 4% drop in September.

The median consensus of economists polled by Reuters was for PPI to quicken slightly to 4.8% year-on-year and 0.15% on a month-on-month basis.  

Said Annabel Bishop, group economist at Investec: "The key positive price inflation contributors on the month were agricultural prices, mining and quarrying, products of petroleum and coal and food at the manufacturing level.

"We still do not expect the South African Reserve Bank (Sarb) to cut interest rates in 2013.

"CPI inflation is the relevant measure and it is likely to rise above 6.0% next year, potentially only falling within the inflation target range in H2 2013, although it will still likely be close to the upper limit during this period.  

Anisha Arora, emerging market analyst at 4Cast said: "South African PPI rebounded from last month's plunge.

"However this is an unsurprising increase given that last month we saw a somewhat uncharacteristic 4.0% month-on-month fall.

"Exported commodities PPI fell for the third consecutive month while imported PPI climbed by a firm 8.0% year-on-year with the recent rand weakness.

"The current state of the domestic economy is unlikely to be supportive of a strong rand retracement in the short term and looking ahead imported goods are still expected to enter manufacturing and factories more expensive than goods leaving the economy.

"In turn this will be yet another cost for consumer goods, inflating CPI down the line which will limit the SARB's scope for policy easing."

Meanwhile Elize Kruger, Kadd Capital economist said: "It's higher than expected. We're seeing a huge increase in food prices - 7.8% month-on-month in agricultural food prices with an actual shocking increase of 29.3% in vegetable prices in a month is quite a spike.

"We see some more food price pressures building in the pipeline that are likely to impact on higher food prices at the consumer level in the next few months."

Absa Capital economist Ilke van Zyl said: "The reasons for the rise are food prices and the weaker exchange rate, but also the low base that was created last month. We had a steep fall in mining and quarrying prices that wasn't repeated.

"But overall, if you even look at the credit figures out this morning where household credit rose to 9.3% year-on-year, couple that with the low electricity consumption figures that came out, shows you that high liquidity insists in the system coupled with lower supply, will shape the inflationary environment.

"We expect the PPI to move upwards or sideways at best but probably not decline or go into a downward phase as we saw previously this year."

Market reaction

The rand firmed slightly to R8.7650 against the dollar at 10:00 GMT, from R8.7735 before the data was released at 09:30 GMT while the yield on the 2015 bond dropped to 5.43% from 5.445% beforehand. 

Statistics South Africa plans sweeping changes to PPI that will make it a more relevant indicator for consumer prices from 2013.

For now, the index is dominated by commodities and tends to move in tandem with those prices, with little pass-through to consumer inflation.

Lower mining production and weaker commodity prices have resulted in a slower rise in prices.

 

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