In June 2011, headline CPI inflation rose by 0.4%m/m, with the annual rate increasing to 5.0%y/y from 4.6%y/y in May. This was in-line with market expectations.
For 2010 as a whole, SA CPI inflation averaged a very respectable 4.3%y/y, after averaging 7.2% in 2009. The current inflation rate is the highest since March 2010.
During June 2011 there were three significant increases in CPI worth highlighting. The first was the scheduled increase in rental costs. Actual rentals for housing rose by 1.5%m/m, pushing the annual rate of change up to 5.9%y/y. Similarly, owner’s equivalent rent rose by 1.6%m/m and by 4.6%y/y. The increase in rental costs added 0.2 percentage points to the monthly increase in inflation, which was in-line with expectations.
The second significant change in the monthly CPI was a further increase in food inflation. Food prices rose by 0.5%m/m, which pushed the annual rate of food inflation up to 7.3%y/y from 6.3%y/y in May 2011. The increase was driven by a fairly broad range of foodstuffs including higher bread and cereal prices (+0.5%m/m), fish prices (+1.0%m/m), dairy products (+0.5%m/m), and vegetables (+2.2%m/m). In contrast, fruit prices fell by 4.2%m/m.
As mentioned above, the annual rate of change in consumer food inflation is now up at 7.3%y/y, which is the highest reading for food inflation since July 2009. We still expect SA food inflation to move higher in the coming months despite the fact that international food prices have moderated a little in recent weeks (see weekly international food price chart attached).
The third key increase in the month was a sharp rise in public transport costs. This jumped by 6.5%y/y, pushing the annual rate up to 7.2%, adding 0.1 of a percentage point to the monthly increase in CPI.
CPI excluding food and fuel is still well within the inflation target at 4.7%y/y, but trending higher (0.4%m/m in June 2011), while services inflation rose to 5.2%y/y from 4.7%y/y in May 2011. It is concerning to see that the inflation rate for very low income earners has now breached the upper end of the target range at 6.5%y/y, while the inflation rate for pensioners is up at 5.7%y/y.
Looking ahead, there are still a number of clear upside risks to SA inflation. These include higher food inflation and higher energy prices (currently there is a daily under-recovery on the petrol price of 35c/l). The extent to which these price pressures will impact on inflation will be heavily influenced by the Rand exchange rate. There is little doubt that the relative strength of the Rand in 2010 cushioned SA from some potentially damaging price pressure, but this is likely to change in 2011/2012. Domestically, the recent electricity price hikes, coupled with other service costs and administered price rises (including water costs) as well as the concerning increase in wage demands could also push SA inflation higher during 2011/2012.
All of these factors clearly suggest there is some further upside risk to inflation in 2011/2012, but driven mostly by cost push or external (international) factors.
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