In December 2010, headline CPI inflation rose by 0.2%m/m, with the annual rate easing to 3.5%y/y compared with 3.6%y/y in November. This was slightly below market expectations, which was for a rise of 3.6%y/y. For 2010 as a whole SA CPI inflation averaged 4.3%y/y, after averaging 7.2% in 2009.
During December 2010 there were few changes to inflation. One of the most notable aspects of the monthly inflation release was a 0.4%m/m decrease in bread and cereal prices, which mostly related to the recent Competition Commission’s ruling that Pioneer Foods decrease the price of bread. This resulted in the major food retailers dropping the price of bread by around 25c to 30c a loaf. There was also a reduction in dairy product prices, vegetables and sugar products. In contrast, meat prices rose by a relatively substantial 1.2%m/m. Overall, despite the sharp escalation in international food prices, SA food inflation remained unchanged in the month and has risen by a very modest 1.4%y/y over the past year.
Rental costs rose by around 1%m/m in December 2010, which was in-line with expectations. On an annual basis residential rental increases remain fairly modest at around 5.4%y/y. The rest of the monthly changes were fairly modest.
CPI excluding food and fuel remained well within the inflation target at 3.9%y/y, and services inflation has now moderated to 5.1%y/y. This moderation is mainly due to the fact that electricity inflation has eased from over 24%y/y a number of months ago to 18.3%y/y currently, and financial services inflation is down at 4.1%y/y from over 10%y/y relatively recently. Medical services inflation remains at 8.1%y/y, education inflation at 9.2%y/y, and water inflation at 9.3%y/y.
In contrast with these still relatively large annual price increases, telecommunication equipment inflation is at -29.6%y/y, recreational equipment at -6.7%y/y and appliance inflation at -1.7%y/y. All three of these categories benefit massively from the strength of the Rand.
Looking ahead to 2011, there are a number of clear upside risks to SA inflation. These include higher food inflation (internationally, traded food commodity prices were up around 30% in Dollars, over the past year), higher energy prices (the price of oil has moved up sharply in the past few months), and higher industrial commodity prices. 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 has cushioned SA in the past few months from some potentially damaging price pressure, but this could easily change in 2011. Domestically, further electricity price hikes, coupled with other service costs and administered price rises (water, medical and education) as well as the concerning increase in wage demands could also push SA inflation somewhat higher during 2011.
All of these factors clearly suggest that SA has reached the low point in the current inflation cycle and that there is some meaningful upside risk to inflation in 2011/2012, driven mostly by cost push factors.
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