Further rise in PPI expected

Posted On Monday, 25 March 2002 03:01 Published by
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THE WEEK AHEADRand's fall will continue to exert pressure on consumer prices
THE WEEK AHEADRand's fall will continue to exert pressure on consumer prices

Economics Correspondent

DATA out this week is likely to confirm that producer inflation is likely to continue its upward march in the months ahead after the rand's sharp depreciation last year, which will in turn exert pressure on consumer prices and interest rates.

The Reserve Bank has hiked rates twice this year, and last month's producer inflation data is unlikely to provide much comfort.

On the positive side, economists expect SA trade balance for February to improve from January's R313m surplus, which was a massive drop from December's R5,5bn.

The consensus is that the rate of change in the producer price index (PPI) will move from January's 11,5% to about 12% for February.

Absa treasury economist Matthys Strauss said producer inflation stronger than 12% would surprise the markets.

If it moved beyond 12% for February, interest rates would move higher and the bond market weaken. Imported inflation jumped significantly in January and a repeat of this was not expected as February was a slow month.

However, the month-on-month increase in PPI from January to February was still stronger as a result of the weak rand. This would put pressure on consumer prices in the months to come, said Strauss.

PLJ Financial Services chief economist Dawie Roodt said some producers saw the depreciation of the currency as a window of opportunity to pass costs to consumers.

The Bank would continue to raise interest rates to fight inflation this year.

Oil prices were starting to move up, and there had been a 19c increase this month, according to Tradek economist Mike Schussler.

PPI would jump next month and should average about 14% for the rest of the year because of the weak rand.

Schussler said consumer prices would turn about 10% to 12,9% for the year and consumer price index (CPI) should be around 8,4%. On trade balance, Roodt said it would be better than that of January.

'Conventional wisdom says as soon as the rand weakens, we are going to export more and import less. But the opposite is happening maybe because exporters are holding back,' he said.

The weak rand and the January surplus would be shifted to February. Looking at the bigger picture, SA was likely to see a surplus in the current account of R10bn for the year, said Roodt.

SA exports were doing well but these figures have not come through the data. 'We are looking at a very, very big trade surplus of about R4bn that will get in either in February or March,' said Schussler.

The Durban harbour had huge backlogs as a result of capacity constraints, while gold and platinum prices had gone up, grapes and wine exports were doing well and so were motor vehicle exports.

'We can expect a trade surplus of R4bn. Whether it comes through in February, March or April, I do not know. It is very important to realise that we have a good trade at the moment,' he said.

Although trade figures were volatile, said Strauss, SA should have a trade surplus of R1,5bn for February. 'We expect the weakening rand to support exports and with the world economy becoming firm, exports should do well for February,' he said.

Publisher: Business Day
Source: Economics Correspondent
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