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Surprise rise in factory gate prices

Johannesburg - Statistics South Africa said on Thursday producer inflation (PPI), which represents domestic output, accelerated to 6.7%  year-on-year in February from 5.5% in January.

The increase was higher than expected.

Jeffrey Schultz, macro strategist, Absa Capita, said the figure reflected strong commodity price gains. 

"Food prices are closer to consumer inflation and I would expect a little bit of traction in those numbers. The PPI number is showing prices are on their way up but largely cost push in nature as opposed to demand-pull," he said.

“We are looking for the first interest rate hike in January 2012 and that’s on the basis that we are seeing an uneven recovery in terms of the high-frequency real economy numbers as well as the fact that a lot of the cost-push pressures are largely from the supply side as opposed to the demand side.”

Razia Khan, head of research, Africa at Standard Chartered said the increase showed that the stronger rand was not a buffer against higher prices for imports.

“However, the implications of this data release for the Sarb (South African Reserve Bank) call depend crucially on the extent of feedthrough from higher PPI into meaningfully higher CPI (consumer inflation)," she said.
 
“For now, however, our view is that the repo rate is likely to remain unchanged until Q4 2011, although clearly the risks to this view are building.”

George Glynos, managing director of ETM said it was "not a good number."

“I don’t like it, it’s not a good number at all, I was disappointed by both exported and imported commodities. I suspect there is an effect from the January depreciation of the rand that has boosted both of those, which could reverse in the March and April numbers because the rand recovered," he said.
 
“I don’t think it changes too much at this stage when it comes to interest rates because it could easily reverse in the months to follow ... We still expect rates to be unchanged for this year and if there is a hike it would be at some point in the first half of next year.”

Consumer inflation was steady at 3.7% year-on-year in February compared with January, data showed last week.

The South Africa Reserve Bank is concerned about the impact on inflation from food and oil prices and will not be soft on tackling inflation, Governor Gill Marcus said on Tuesday.
 
The Reserve Bank kept its benchmark repo rate on hold at 5.5% last week as expected but raised its inflation and growth forecasts, reinforcing expectations interest rates will start to rise later this year.
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