Rising inflation increases chance of rate cut

Producer price inflation quickened year-on-year last month, driven largely by higher commodity prices, though analysts said production costs were likely to steady in coming months.

Statistics SA said prices at the factory gate rose 6.8% year-on-year in May from 5.5% in April, but the month-on-month rate of increase was slower at 0.2% compared to 1.5% previously.

Export-commodities inflation was 4.8% year-on-year in May compared with 0.2% the month before, and imported-commodities inflation accelerated to 6.5% year-on-year from 5%.

"The sharp rise in the PPI since the beginning of the year is mainly because of commodity prices, which were quite high a year ago but should fall out of the index during the rest of the year," said Citadel economist Salomi Odendaal.

Consumer inflation slowed to a four-year low of 4.6% in May, Stats SA said on Wednesday, confirming easing consumer pressures and making another rate cut possible.

"A negative growth surprise, combined with the current favourable inflation outlook, could prompt the Reserve Bank to loosen monetary policy further," said Carmen Altenkirch, an economist at Nedbank.

The rand extended its losses against the dollar on the news that South Africa's current account deficit widened to 4.6% in the first quarter of this year from 2.8% in 2009.