Broad-based producer inflation adds further fuel to prospect of rate hike

Following on yesterday's (30 May 2007) much worse-than-expected consumer inflation excluding mortgages (CPIX) data released yesterday, April producer price inflation also came in significantly above expectations at 11.1% - a full percentage point above our forecast and well above the Reuters consensus forecast 10.4%, says Old Mutual Investment Group (SA) (OMIGSA) economist Johann Els.

"Apart from the expected big increases in imported oil costs, the higher petrol price and higher food prices, the increases were broadly based, with commodity components (coal & metals & metal ores), beverages, footwear, chemicals, rubber and transport equipment all recording big monthly increases - especially in the imported categories," he says. 

He notes that the broad-based nature of the increases in these inflation figures significantly raises the risks that the SA Reserve Bank will increase interest rates at next weeks Monetary Policy Committee meeting.

CPIX inflation breached the upper limit of the target range in April, printing 6.3% (from 5.5% in March) versus our and market expectations of 5.9%.  The main features in the April number were the anticipated big food and petrol price increases.  But big unexpected increases in rental-related housing, personal care, recreation, reading matter and medical care were behind the higher-than-expected number.

Other changes were in line with expectations - monthly declines were recorded in clothing and footwear and furniture and appliances, while vehicles recorded a 0.3% monthly increase. 

There was a risk that CPIX could breach the upper limit of the target range and that happened yesterday.  But despite continued risks from rising oil and food prices, CPIX inflation should still trend lower towards year-end.  We now expect year-end CPIX inflation to be about 5.5%.