In May 2011, headline CPI inflation rose by 0.5%m/m, with the annual rate increasing to 4.6%y/y, from 4.2%y/y in April. This was higher 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. The current inflation rate is the highest since May 2010.
During May 2011, there were very few major changes to inflation. The main reason for the higher than expected inflation reading was a jump in food prices. Food inflation rose by a substantial 1.7%m/m in May, which contributed 0.3% to the monthly change in CPI.
There was also a further rise in fuel prices, which increased by 2.9%m/m, taking the annual rate of petrol inflation to 17.7%y/y. This added 0.1% to the monthly change in inflation.
The main reason for the increase in food inflation during May was a substantial 2.9%m/m increase in bread and cereal prices, a 3.0%m/m increase in oils and fats prices, a 4.3%m/m increase in vegetable prices, a 2.1%m/m increase in sugar and sweets prices and a 1.5%m/m rise in diary prices. These increases were partially offset by a 0.1%m/m decline in fish prices as well as 1.4%m/m drop in fruit prices.
On an annual basis, food inflation rose to 6.3%y/y in May from 4.8%y/y in April. This is the highest reading for food inflation since July 2009. We expect SA food inflation to move still higher in the coming months.
CPI excluding food and fuel is still well within the inflation target at 3.7%y/y (0.2%m/m in May 2011), while services inflation remained unchanged at 4.7%y/y; having been well over 6%y/y fairly recently. It is concerning, however, to see that the inflation rate for very low income earners is now up at 5.4%y/y, while the inflation rate for pensioners is up at 5.2%y/y.
Looking ahead, there are a number of clear upside risks to the SA inflation. These include higher food inflation (see discussion above), and higher energy 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 in 2010 cushioned SA from some potentially damaging price pressure, but this is likely to change in 2011/2012.
Domestically, further 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 meaningful upside risk to inflation in 2011/2012, but driven mostly by cost push or external (international) factors.
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