Pretoria – The Production Price Index (PPI) for September has remained unchanged with that of August 2007, coming in lower than expected at a 9.4 percent rise year on year (y/y).

The PPI measures prices at the manufacturing level, and not at the point where the goods are sold to consumers, as with the Consumer Price Index (CPI).

The PPI therefore also does not factor in Value Added Tax (VAT) or the price of services which account for about 45 percent of the final price to consumers.

Statistics South Africa (Stats SA) figures released Thursday show that the annual rate of change at September 2007 can be explained by the increases in the annual rates of change in the production price indices for agricultural products, food, electricity, furniture, radio, TV and communications equipment and apparatus.

Agricultural products jumped one percentage point from 25.1 percent at August to 26.1 percent at September 2007, whilst food at manufacturing increased steadily to 16 percent at September from 15.4 percent in August of this year.

“I expected the PPI data to come in a bit higher at 9.7 percent,” said economist at the Bureau for Economic Research (BER) Christelle Grobler, speaking to BuaNews on Thursday.

Ms Grobler said it was unlikely that PPI data, which came in lower than expected, would have much of a bearing on the South African Reserve Bank’s (SARB’s) interest rate decisions.

“Consumer spending is still the main driver behind interest rate decisions, and at the moment, consumer spending is experiencing positive growth,” she said, adding, however, that sales in motor-vehicles and furniture had come down significantly.

“We [at the BER] still see the PPI going up to about 10.8 percent before December this year. I predict October’s PPI to come in at 9.2 percent y/y,” said Ms Grobler.

Whilst some analysts are already predicting interest rate hikes for December and even February next year when the Monetary Policy Committee (MPC) meets again, Ms Grobler said their official forecast remains that rates won’t change in December.

“But there is always a big risk that interest rates will be adjusted by 50 basis points,” she said. This would result in the eighth consecutive hike since the inflationary cycle began in June last year.

Wednesday’s Consumer Price Index excluding mortgage interest rates (CPIX) figure, that came in higher than expected at 6.7 percent, is not helping the interest rate decision said Ms Grobler.

“You have to look at what are the drivers behind inflation. You can’t react to current inflationary pressure; the SARB has to deal with future inflation targets.”

She said the current strength of the Rand is acting as a type of buffer against international markets, and despite oil prices being at $83 per barrel, South Africa has been over-recovering on fuel prices.

On Wednesday, Chief Economist and Director at Econometrics Tony Twine told BuaNews that: “We have been over-recovering slightly for all fuel products for about 10 days of the month, and so even if we then under-recovered for the remaining days, the difference will be a couple of cents up or down.”

Ms Grobler reiterated the sentiments of Mr Twine saying: “Yesterday’s data shows that we had an over-recovery of 3.2 cents. So if there is a change in the fuel price [on 7 November] it won’t be anything significant.”

She said South Africans can only look forward to CPIX peaking next year February, where after inflation will hopefully return to within the 3-6 percent target band by the second quarter of 2008. - BuaNews