PPI slows, but worries on inflation continue

WHILE South Africa's November producer price index came as a surprise to the market, most economists agree that the inflation front continues to look bleak for the next few months.

WHILE South Africa's November producer price index came as a surprise to the market, most economists agree that the inflation front continues to look bleak for the next few months.

And as with Wednesday's consumer inflation data, economists are divided about whether the Reserve Bank will once again raise rates when the Monetary Policy Committee meets on January 30-31.

Data released by Stats SA yesterday showed PPI rose by 9.1percent year-on-year in November, from a 9.5percent year-on-year increase in October. The PPI rose 0.3 percent on a monthly basis after October's monthly increase of 1.1percent.

PPI was expected at 9.6percent year-on-year, a survey of 13 economists found.

Nedbank economists said the better-than-expected figure was mainly due to a slight moderation in the prices of domestically produced commodities.

Prices of agricultural products fell sharply over the month, with prices of fresh produce and other agricultural products down 1.8percent and 16.8percent respectively.

However, the main upward pressure came from imported inflation, where higher import prices of crude oil in the "other mineral products" category, transport equipment, manufactured food products as well as petroleum and coal products, were mainly to blame for 0.7percent month-on-month increase in this category.

Nedbank Economic Unit's preliminary forecast for the December PPI is 10.1percent year-on-year, with a very low base and high food, and oil prices likely to keep PPI inflation at high levels over the next five months.

Thereafter they expect producer inflation to ease, reaching around 6.5 percent by the end of 2008. "Despite today's better-than-expected outcome, overall news on the inflation front will probably remain bleak over the next few months," they said.

Annabel Bishop, economist at Investec Group, said PPI inflation is still well above the 6percent upper limit of the inflation target, and is exerting upward pressure on consumer price index. - I-Net Bridge