Costs of production going up

Factory gate inflation accelerated for the eighth straight month in the year to March, slightly below expectations but showing factory gate price pressures are building after last year's recession.

Higher producer prices could start filtering through to consumer inflation, but this is unlikely to change the medium-term interest rate outlook after the Reserve Bank signalled last week that rates will stay on hold for a while.

Statistics South Africa said yesterday Producer Price Index, representing domestic output, quickened to 3.7% year on year in March from 3.5% in February, although it slowed to 0.3% from 0.4% on a monthly basis.

A Reuters poll last week showed the index was expected to quicken to 3.9% year on year and 0.5% month on month.

"It's certainly better than expected but I think the upward trend on the producer side is concerning and will eventually put pressure into consumer prices, even if only in 2011," said KADD Capital economist Elize Kruger.

Analysts said the acceleration in the March annual PPI figure was largely due to base effects after South Africa's recession last year, the first in nearly two decades.

Some upward price pressure came from mining and quarrying on the back of rising commodity prices, said Investec economist Annabel Bishop.

Price declines continued in agricultural products, mainly food, which will keep both Consumer Price Index food and headline CPI inflation subdued, she said.

"We expect producer inflation to continue ramping up sharply this year," said Bishop, saying the Reserve Bank was unlikely to cut interest rates further despite a drop in March consumer inflation to 5.1% from 5.7% previously.

The Reserve Bank has cut interest rates by 5.5 percentage points since December 2008 - the last 50 basis point reduction in March - to help spur economic growth. But Reserve Bank Governor Gill Marcus said last week the key repo rate was likely to remain flat for "some time".