By Vernon Wessels

Johannesburg - A spike in producer price inflation snapped an eight-month sliding streak but failed to dampen hopes that the Reserve Bank would cut interest rates by at least 1 percentage point in a fortnight, economists said yesterday.

The producer price index (PPI), which measures price increases before they reach consumers, accelerated to an annual 2.3 percent in June from a revised 1.2 percent in May, according to data released by Statistics SA.

Factory gate inflation has been dropping since it peaked at 15.4 percent in September last year.

Economists polled by Bloomberg expected a rise of 1.1 percent, while those quizzed by Reuters forecast a 1.4 percent increase.

The disappointing figure can be attributed mainly to an adjustment in the tariff structure of Eskom, which makes electricity more expensive during the three winter months (June, July and August) but cheaper in the nine summer months.

The changes, which align tariffs with the actual cost of supplying electricity, were introduced in June last year, but only implemented a month later. This caused electricity prices to surge 45 percent in June compared with the same month last year. (Tariffs were lower in June 2002 as the new structure had not yet been introduced.)

Rising electricity costs contributed 1.3 percentage points to the overall PPI figure, and, if stripped out, PPI would be running at 1 percent, said Réjane Woodroffe, a portfolio manager and economist at Metropolitan Asset Managers.

"Fortunately, this is merely a blip in the numbers and should not raise any alarms with respect to the underlying inflationary trend and the ability of the Reserve Bank to cut by 1 percentage point or more."

Woodroffe was concerned about buoyant oil prices - which have risen 20 percent since the beginning of May - and the possibility that the rand could weaken towards the end of the year on softer commodity prices and a widening current account deficit.

The price of locally produced goods at the factory level rose 4.4 percent in June from 3.5 percent in May and 1.6 percent on a month-on-month basis from a decline of 0.6 percent in May.

Imported prices fell 3.4 percent on an annual basis in June from a decline of 4.8 percent in May while rising 0.7 percent on a month-on-month basis from a fall of 3.4 percent in May.

Johan Rossouw, the chief economist of Vector Securities, said other components of PPI, such as agriculture, food at a manufacturing level, petroleum and coal products, and transport equipment were subdued and pointed to "an increasing risk of production price decline [deflation]".