SA inflation will remain sticky

Johannesburg - Inflation will remain relatively sticky next year, as some reprieve from rand-induced disinflation in prices is offset by margin recuperation and spillover effects of high electricity prices and other input costs, according to an economist on Tuesday.

"These elements should limit further repo rate declines, despite the inflation benefits arising from the strength in the rand exchange rate," says economist from Standard Bank, Danelee van Dyk.

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 at 6.4% year-on-year (y/y) in August from 6.7% y/y in July, Statistics South Africa (Stats SA) said on Tuesday.

CPI was up 0.3% month-on-month (m/m) after increasing 1.1% in July.

"Encouragingly, consumer goods inflation moderated further to 5% y/y in August from 5.5% y/y in July. However, services inflation rose further in August to 8.1% y/y from in July to 8% y/y following a brief respite to 7.6% y/y in June. This was chiefly a result of the electricity and other municipal levies that were surveyed in August.

"As such, we will scrutinise services inflation in months to come for signs of less rigidity (in the absence of additional surveys, we expect services inflation to moderate somewhat). This could have a marked impact on lowering the overall inflation profile, which could alley fears over the secondary impact of high wage costs and electricity tariff increases on inflation," says Van Dyk.

"Rand strength is currently exerting pressure on retailers to lower their selling prices, but forward-looking surveys reveal that they are less inclined to do so in the future owing to upside pressure on their purchase prices.

"Overall, consumer inflation is expected to average 7.3% y/y this year and to improve to around 6% y/y next year," says the economist.

Consumer inflation was expected to have receded to 6.4% y/y in August, according to a survey of leading economists by I-Net Bridge. Forecasts among the economists surveyed ranged from 6.3% to 6.7%.

Food and non-alcoholic beverages was reported as contributing +1.1 percentage points of the 6.4%, while alcoholic beverages and tobacco contributed 0.7. Clothing and footwear added +0.2 percentage points to the y/y increase, housing and utilities (+1.8) and household contents and services (+0.4), health (+0.2), transport (-0.5) and recreation and culture (+0.5).

Education added +0.2, restaurants and hotels (+0.3), and miscellaneous goods and services (+1.7).

The data showed that food and non-alcoholic beverages increased 6.8% y/y in August from 8.3% in July.

CPIX hit 11.3% in 2008 from 6.5% in 2007 and CPI struck 11.5% from 7.1% in 2007.

- I-Net Bridge