Soaring producer inflation to hit consumer wallets

GAINS in the rand this week may have brought smiles to consumers, but an acceleration in producer inflation to its highest level in a year shows that tough times still lie ahead, say economists.

Higher producer inflation strengthens the case for the Reserve Bank’s monetary policy committee to continue raising interest rates, despite weak economic growth.

“We anticipate that the monetary policy committee will remain focused on the upside risks to inflation and continue raising the repo rate with further increases of 25 basis points projected at each of its next two meetings,” economists at Nedbank said this week.

Price pressures on producers were too significant for retailers to continue absorbing, as they had done.

“We expect a greater degree of pass-through to consumers in the coming months,” said Bart Stemmet, analyst at NKC African Economics.

Producer inflation jumped to 8.1% in February from a year before and 7.6% in January, caused by higher prices of food, beverage and tobacco products, coke, petroleum, chemical, rubber and plastic products and machinery, Stats SA said on Thursday. Food imports were more expensive due to a weaker rand.

Stemmet said that, compared with February last year, PPI indices for cereals increased by 61.6% and fruit and vegetables by 28.8%.

On a monthly basis, producer inflation jumped 0.8% from January to February. Producer prices will gain in coming months with pressure greatest from food products as a result of the drought. Electricity and water inflation was 12.6% year on year in February, compared with 11.6% in January.

Annabel Bishop, chief economist at Investec, forecast a climb towards 10% in producer inflation this year, but cautioned that with insufficient state support for farmers to ease them through the drought, the country ultimately also risked food security.

Bishop said that while recession risks for the economy had increased, credit conditions were tighter, impairments were higher, growth in corporate

Insufficient state support for farmers risked food security

profitability was very low and private sector retrenchments were rising.

This month, the fuel price is expected to rise with the hike in the fuel levy by 54c a litre. The oil price was expected to average around $40 to $45 per barrel, according to economists.

The lower oil price last year helped South Africa in the price of imports.

The trade deficit narrowed to R1.1-billion from R18-billion in January, largely due to stronger exports.

But John Ashbourne, Africa economist at Capital Economics, said a doubling of automotive exports month on month indicated that once-off effects contributed to the narrowing — but rises in the oil price and the need for imports due to the drought would cause the deficit to widen.