Pressure on factory gate inflation after recession

FACTORY gate inflation accelerated for the eighth straight month in the year to March, slightly below expectations but showing factory gate price pressures are building after last year's recession.

FACTORY gate inflation accelerated for the eighth straight month in the year to March, slightly below expectations but showing factory gate price pressures are building after last year's recession.

Higher producer prices could start filtering through to consumer inflation, but this is unlikely to change the medium-term interest rate outlook after the Reserve Bank signalled last week rates will stay on hold for a while.

Statistics South Africa said yesterday producer price index, (PPI) representing domestic output, quickened to 3,7 percent year-on-year in March from 3,5percent in February, although it slowed to 0,3percent from 0,4percent on a monthly basis.

A poll last week showed PPI was expected to quicken to 3,9percent year-on-year and 0,5percent month-on-month.

"It's certainly better than expected but I think the upward trend on the producer side is concerning and will eventually put pressure into consumer prices, even if only in 2011," said KADD Capital economist Elize Kruger.

Analysts said the acceleration in the March annual PPI figure was largely due to base effects after South Africa's recession last year, the first in nearly two decades, which resulted from depressed local and global demand.

Some upward price pressure came from mining and quarrying on the back of rising commodity prices, said Investec economist Annabel Bishop.

Price declines continued in agricultural products, mainly food, which will keep both CPI food and headline CPI inflation subdued, she said.

"We expect producer inflation to continue ramping up sharply this year," said Bishop. - Reuters

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