In May 2010, headline CPI inflation rose by only 0.2% month-on-month. This in-line with market expectations. On an annual basis, CPI inflation eased further to 4.6%y/y from 4.8%y/y in April 2010. The market was expecting 4.6%y/y (STANLIB 4.7%y/y). This is the lowest level of consumer inflation since 2006.
During May 2010 there were only a few significant changes to inflation. The most notable aspects were an increase in transport costs, which rose by 0.3%m/m adding 0.1 of a percentage point to the monthly increase in inflation. This was mainly due to a 1.7%m/m increase in the petrol price (the petrol price fell by 27c/l in June). In addition, food prices rose by 0.4%m/m, also adding 0.1 of a percentage point to the monthly increase.
CPI excluding food and fuel is well within the inflation target at 5.4%y/y, but services inflation remains on the high side at 6.4%. This is mainly due to the fact that electricity inflation is at 24.4%y/y, medical services inflation at 8.0%y/y, education inflation at 9.2%y/y, and water inflation at 9.4%y/y. These four services comprise 8.84% by weight of the consumer price index.
Consumer inflation is expected fall further over the coming months to below the mid-point of the inflation target, helped partly by base effects, sustained low food inflation, a firm Rand and very modest global inflation. Looking further-out, the recently announced electricity price hike, as well as the pending increase in water prices, other administered prices as well as a concerning increase in wage demands will tend to push inflation somewhat higher into 2011.
For 2009, South Africa’s consumer inflation averaged 7.2%. In 2010, the average is expected to fall to around 5.0%, with inflation in the first half of the year averaging a little below 5%, but then trending modestly higher in the final quarter of 2010.
The latest inflation reading, coupled with a still firm Rand and declining employment data will re-ignite the debate on a further cut in interest rates. However, interest rates are already at around 30-year lows and the last GDP data release showed that the economy was growing at 4.6%q/q with every major sector of the economy expanding. Furthermore, while local inflation is well under control, there are some risk to the upside which cannot be completely ignored. On balance we think the Reserve Bank will keep rates on hold at the next interest rate meeting in July, but then, hopefully, keep rates unchanged until well into 2011.
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