Inflation at lowest since 2006

Johannesburg - The increase in South Africa's consumer price index (CPI), which is used by the South African Reserve Bank (Sarb) for its inflation target, was 4.6% year-on-year in May from 4.8% y/y in April, Statistics SA said on Wednesday.

It remains well within the target band of between 3% and 6%.

CPI was at 0.2% month-on-month (m/m) from 0.2% m/m in April.

CPI was expected to have decreased to 4.6% y/y in May from 4.8% in April, according to a survey of leading economists by I-Net Bridge.

The CPI edged below 6% in February after it had reached levels higher than 6% the previous two months.

Forecasts among the eleven economists ranged from 4.4% to 4.9%.

Annual CPI in 2009 struck 7.1% from 11.5% in 2008. It was at 7.1% in 2007.

The annual average for CPI was 4.7% in 2006 from 3.4% in 2005, compared with only 1.4% in 2004, which was the lowest annual average since 1958.

Carmen Altenkirch Economist at Nedbank said: "Consumer inflation came in spot on market expectations, easing to its lowest level since May 2006. 

"Downward pressure on inflation came from lower food prices as well as a further moderation in goods inflation, particularly durable and semi-durable goods. 

"Double-digit administered price inflation remains the main driver of headline inflation.

"Although we still expect interest rates to remain on hold well into 2011, the MPC may surprise by easing further in July, given the near-term improvement in inflation and inflation expectations, particularly if growth figures start to disappoint." 

Investec economist Annabel Bishop said: "CPI inflation fell even lower in May, to 4.6% y/y, almost at the midpoint, compared to April's 4.8% y/y. Rand strength remains key in aiding the ongoing moderation in the inflation outcome, but the ongoing weakness in demand is also important, as well as the statistical base effect.

"CPI inflation is likely to fall to 4.0% in the third quarter as the lagged effect of last year's recession continues to impact the cost of
living.

"We expect another interest rate cut in the current cycle, of 50 basis points – either at the July or September monetary policy committee meeting."

 - I-Net Bridge