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PPI's 11.8% much higher than expected - economist

by Michael Appel
on 24 Apr 2008
BuaNews Online
BuaNews Online

The Production Price Index (PPI) for March 2008 has come in much higher than expected at 11.8 percent year-on-year (y-y) reported Statistics South Africa (Stats SA), on Thursday.

March's PPI is 0.6 of a percentage point higher than February's PPI figure of 11.2 percent y/y.

"The PPI has come in horribly higher than expected ... it is well above the Consumer Price Index [CPI], so there are upward pipeline inflation pressures now.

"A knee-jerk reaction by the Reserve Bank would be to hike interest rates, but there is increasing evidence that interest rate hikes are not working to control inflation," Investment Solutions senior economist, Chris Hart told BuaNews, Thursday.

Mr Hart believes government needs to be looking at industrial policy, removing monopolies and promoting competitiveness in the economy.

Competitiveness, he said, spurs on productivity which was what the South African economy needed.

"We need to look at more than just monetary policy, and we need to start looking at combining it will fiscal policy," said Mr Hart.

The increase in factory gate prices is attributed to an increase in the price of mining and quarrying, but was partially counteracted by decreases in the prices of agricultural products and basic metals.

Thursday's PPI came in higher than expected with economists forecasting an expected 10.9 percent increase in production prices.

The latest PPI figure comes on the back of Wednesday's five year record high double digit Consumer Price Index excluding mortgage costs (CPIX) of 10.1 percent y/y.

The combined effect of increased inflation coupled with a rise in the production cost of goods does not bode well for the Monetary Policy Committee's (MPC's) interest rate decision in June 2008.

Speaking to BuaNews on the release of the CPIX figure on Wednesday, economist at Econometrix Treasury Management (ETM) George Glynos said the latest CPIX data has "sealed the case for the Reserve Bank's Monetary Policy Committee to raise interest rates in June," adding, it has also upped the chance of another interest rate hike in August 2008.

Mr Glynos highlighted that the price of oil hit fresh record highs on Wednesday, with oil at R118.98 per barrel.

High oil prices, he said, translated directly into higher fuel prices with an expected 30 cent fuel price increase in the first week of May 2008. - BuaNews

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