Domestic output costs lifted by Nersa hikes

Factory-gate inflation quickened more than expected last month in comparison with unusually weak figures last year. Higher commodity prices also contributed.

Statistics SA said yesterday that producer inflation accelerated to 5.5% year on year in April - beating a market forecast of 4.5% - from 3.7% in March.

On a monthly basis, the producer price index, which covers domestic output, was at 1.5% from 0.3% in March, also higher than the Reuters poll consensus of 0.5%.

Investec economist Annabel Bishop said the rise in factory-gate prices was "due to a higher-than- expected rise in electricity costs".

She said in a research note: "Without the . electricity price increase, PPI inflation would have been 4.9% year on year in April, which is close to the consensus estimate of 4.6% year-on-year," said Bishop.

Colen Garrow, an economist at Brait, said: "It's a horrible number. It will be interesting to see how it will respond to the crisis in Europe; there will still be some deflationary winds blowing through."

More than a third of South Africa's exports go to the euro area, where some countries are experiencing fiscal problems that have raised fears of an economic slowdown in the region.

Lower global and local demand dragged South Africa into its first recession in almost two decades last year, and the PPI slowed sharply. Prices fell for seven months last year before quickening in December.

The higher annual PPI was not expected to feed through to consumer prices immediately and is therefore unlikely, on its own, to have a big effect on monetary policy.

"In our view [the PPI has] no immediate implication for inflation because it is largely being driven by higher commodity prices rather than the increased cost of imports for manufacturing," said Carmen Altenkirch, a Nedbank economist.

Kevin Lings, an economist at Stanlib, said the PPI has been below 6% for 14 consecutive months.

"However, PPI inflation is expected to continue to move higher during 2010, mostly due to base effects, higher commodity prices and some currency weakness."

Data on Wednesday showed that annual consumer price inflation slowed more than expected to a four-year low of 4.8% in April, leaving the door open for another rate cut.

The Reserve Bank reduced its repo rate by 550 basis points to 6.5% between December 2008 and March this year, and governor Gill Marcus last month signalled that rates would stay on hold for "some time".