South Africa's consumer price index (CPI), used by the South African Reserve Bank (SARB) to target inflation, fell further than expected to 4.2% year-on-year in June from 4.5% y/y in May. The 4.2% recorded in June is its lowest level since 2006. CPI was unchanged month-on-month after increasing 0.2% in May. A survey of ten leading economists by I-Net Bridge had forecast anything from 4.3% to 4.7%. The Investec Group Economics unit had been among the closest, with a forecast of 4.3%. "As we expected, CPI inflation fell significantly in June compared to May, due to weak demand pressure in the economy. The outcome continues to support our view that CPI inflation will fall to 4.0% in the next couple of months," said Annabel Bishop of Investec Group Economics. Food inflation continued to slow between May and June as indicated by the food and non-alcoholic beverages index of the CPI which decreased by 0.4% between the two months while the annual rate decreased to 0.7% in June from 0.8% in May. The monthly decreases in the food and non-alcoholic beverages index were however counteracted by increases in vegetables and fish. "The fall-off in food inflation, from a peak of 18.8% y/y in mid-2008, has been the main factor pulling the overall rate of consumer inflation lower," said Stanlib economist Kevin Lings. "Current domestic food price trends could inject significant downside pressure on overall consumer inflation," noted economist at Standard Bank Shireen Darmalingam. The stronger rand coupled with weaker oil prices led to a 27c a litre decrease in the price of petrol, which in turn has helped ease the pressure on the transport index. The index decreased by 0.8% between May and June while the annual rate decreased to 6.7%. A recorded 16.8% decrease in motor vehicle insurance led to a 0.9% decrease in the miscellaneous goods and services index, said Stats SA. Upward pressure over the month came from the housing and utilities index and the restaurants and hotels index. The millions of tourists who visited the country during the Fifa Soccer World Cup that was held between June and July, could have contributed to the 4.3% increase in the restaurants and hotels index, as this rise was mainly due to a 17.6% increase in hotel accommodation, according to Stats SA. "There was some evidence of World Cup pricing as far as hotels and rental accommodation is concerned," said Darmalingam. Falling inflation bodes well for an interest rate cut but several factors which are likely to have upward inflationary pressure may prevent this. These include Eskom electricity tariff increases and high wages settlements. The Absa Capital team called these factors "structural barriers" that will cause inflation to tick up again and prevent the SARB from further reducing interest rates. "Administered prices continue to prove the most challenging barrier to SA's inflation outlook. The high level of wage settlements in the economy may also prove challenging to consumer prices further out, in our view," commented Jeff Schultz, macro strategist at Absa Capital. "Although we expected the MPC to leave interest rates unchanged, last week's more dovish statement suggests there is still a chance of another cut in this cycle, particularly if the economy stalls in the coming months and inflation continues to surprise on the downside," commented Carmen Altenkirch, economist at Nedbank. Stats SA said provinces with an annual inflation rate lower or equal to headline inflation were Limpopo (3.1%), Kwazulu-Natal (3.2%), Northern Cape (3.6%), Eastern Cape (3.7%), North West (3.7%), Mpumalanga (3.8%), Free State (3.9%) and Gauteng (4.2%). The Western Cape was the province with an annual inflation rate higher than headline inflation at 4.8%. CPI edged below the SARB's target range of between 3% to 6% in February after reaching higher than 6% the previous two months. Annual CPI in 2009 struck 7.1% from 11.5% in 2008. It is expected to average 5% in 2010. Source: I-Net Bridge |
