Johannesburg - Consumer inflation delivered a welcome surprise on Wednesday, with the inflation rate for June falling to 4.2% from 4.6% in May – the lowest level since May 2006 and well within the Reserve Bank's 3% to 6% target range.
Inflation has declined from a recent peak of 13.6% in August 2008 and edged below 6% in February. Disinflation in food prices, which have a weighting of about 15% in the consumer price index (CPI) basket, has been the main factor driving inflation lower.
This has been counteracted by high administered prices, such as electricity costs, but the negative factors haven't been enough to prevent inflation from slipping below the mid-point (4.5%) of the target band, as had been expected.
"These figures, together with yesterday's bad employment data, suggest there's still a window of opportunity for the Reserve Bank to cut interest rates.
"But we think the bank will keep rates unchanged, unless there are other figures showing a weak economy. The key point is that we are a long way away from hikes in interest rates," Stanlib economist Kevin Lings said.
Lings said food prices are the main reason why inflation has surprised on the way down. The food and non-alcoholic beverages index decreased by 0.4% between May and June this year, which means prices actually fell.
The annual rate of increase in food prices is only 0.7%. Lings said food prices at the agricultural level were still dropping, so there was no reason to fear a resurgence of food price inflation in the current season.
"We are in the sweet spot for inflation, and the CPI rate could fall to below 4%," he said.
In June, petrol prices fell, so that the transport index decreased by 0.8% between May and June. The petrol price drop was 27c/litre. The extent to which low petrol prices are keeping inflation down is clear from the annual rate of increase in the transport index, which decreased to 2.2% in June 2010 from 3.5% in May this year.
Nedbank economist Carmen Altenkirch said inflation had come in well below market expectations of about 4.5%. She said the surprise was helped by a decline in insurance costs, which make up 7.7% of the basket. She noted that the one aspect of inflation that stood out as bad news was administered prices, which were in double digits.
Altenkirch said inflation was expected to pick up slightly, ending the year at about 5%, if stronger domestic demand enabled retailers to regain some pricing power. However, a strong rand and disinflation abroad would help to contain price pressure.
"Although we expect the monetary policy committee to leave rates unchanged, last week's more dovish statement suggests there is still a chance of another cut in this cycle, particularly if the economy stalls in the coming months and inflation moderates more than expected in the short term," Altenkirch said.
- Fin24.com