Economics Correspondent

RETAILERS are preparing to raise prices substantially in the medium term as costs rise and consumer demand remains buoyant, evidence from the latest Standard Bank trade management indices suggests.

With consumer demand sustained by last year's interest rate hikes, and food and petrol prices starting to rise, retailers have less incentive to reduce prices or keep prices steady.

The bank's monthly indices, which include a trade activity and expectations survey, reflect business conditions and sentiment in the services sector, such as retail trade and financial services.

Last month's survey showed an improvement in trade activity, with the index rising to 53 points from 47 in January, while the index measuring expectations was relatively unchanged at 60,3 points.

Standard Bank economist Johan Botha said the strong views drawn from the survey, that both selling and purchasing prices would rise sharply, indicated that "higher inflation expectations may still be entrenched in this segment of the economy".

He said the concerns raised by the South African Reserve Bank about the level and downward stickiness of inflation expectations were "justified", since retailers polled in the survey agreed that prices would rise strongly despite market consensus that inflation would remain benign this year.

In the trade expectations survey, the index measuring selling and purchase prices had a strong level of 64 points, reflecting "strong agreement that prices will increase over the medium term", said Botha.

Despite the Bank's optimistic outlook for inflation where CPIX (consumer inflation less mortgages) is forecast to remain within the 3%6% target band until 2006 it raised concerns about inflationary pressure from robust consumer demand, high wages and rising food costs due to the drought.

Although CPIX, which grew at 4,2% year on year in January, remained fairly benign, economists expected inflation to head closer towards the 6% ceiling of the target before the end of the year, prompting the Bank to hike interest rates.

Mar 10 2004 07:42:08:000AM Nasreen Seria Business Day 1st Edition