In April 2011, headline CPI inflation rose by only 0.3%m/m, with the annual rate rising modestly to 4.2%y/y from 4.1%y/y in March. This was lower than market expectations for a rise to 4.4%y/y.
For 2010 as a whole SA CPI inflation averaged a very respectable 4.3%y/y, after averaging 7.2% in 2009.
During April 2011 there were very few major changes to inflation. The main increase was a sharp rise in transport costs, in particular petrol prices. As expected, petrol inflation recorded a monthly rise of 5.6%m/m (reflecting mainly the recent 54c/l increase in the petrol price), taking the annual rate of petrol inflation to 16.3%y/y. This added 0.2 percentage points to the overall increase in CPI during the month. Importantly, there was a further 29c/l increase in the petrol price during May, which will add additional upward pressure to the annual rate of change in petrol inflation next month.
A surprise in this month’s inflation report was the fact that food inflation actually fell by 0.1%m/m in April. This is in contrast with the sharp rise in domestic food prices during March 2011 (+1.4%m/m) as well as the general upward trend in global food inflation (although international food prices have moderated a little in recent weeks). The main reason for the decline in food inflation during April was a drop in the price of meat (-0.3%m/m), fish (-0.9%m/m) and fruit (-1.5%m/m). These declines more than offset a modest increase in the price of bread and cereals. On an annual basis, food inflation eased to 4.8%y/y from 5.1%y/y.
Clearly, the concern about a very significant and sharp increase in domestic food inflation (following the sharp increase in global food prices) has still not materialised. Instead, the rate of increase appears to be fairly manageable and orderly, which possibly reflects a combination of competition in the food retail sector as well as the state of the consumer. We still expect SA food inflation to move noticeably higher in the coming months, but the rate of increase appears relatively well contained.
CPI excluding food and fuel remained well within the inflation target at 3.6%y/y (0.2%m/m in April); while services inflation has now increased a little to 4.7%y/y, from recent levels of well over 6%y/y.
Looking ahead, there are a number of clear upside risks to SA inflation. These include higher food inflation (as discussed above), and higher energy prices. The extent to which these price pressures will impact on SA 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 pressures, but this is likely to change in 2011/2012. Domestically, further electricity price hikes, 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 that there is some meaningful upside risk to inflation in 2011/2012, but driven mostly by cost push factors.
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