SA inflation figures surprise

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 up 6,9 per cent year-on-year (y/y) in June from 8,0 per cent y/y in May, Statistics South Africa (Stats SA) said yesterday.

Headline CPI inflation was up 0,4 per cent month-on-month (m/m) after increasing 0,4 per cent in May.Consumer inflation was expected to have receded to 7,2 per cent y/y in June, according to a survey of leading economists by I-Net Bridge. Forecasts among the ten economists surveyed ranged from 6,9 per cent to 7,3 per cent.Senior economist at Nedbank, Carmen Altenkirch, says it is ‘slightly below market expectations and adds to the case for further interest rate cuts. The main contributors to the monthly increase in inflation are likely to have been food and fuel as well as owner’s equivalent rent.’Inflation is expected to ease further over the coming months. Unfortunately, second-round effects are now well entrenched in the economy, making prices extremely sticky. The recent round of above-inflation wage inflation is certainly not helping maters either – and will add to inflationary pressures in the economy.’However, the rand’s recent strength is likely to go some way to mitigating these effects.’Mike Schussler, director at Economists.co.za, is happy about the announcement. ‘It’s very good news, although we have to be careful that this is the time of year that a technical downswing would probably have taken place anyway, but nevertheless I am very pleased with that figure as it should give us a bit of room for a 50 basis points cut later in the year.’Economist at Quantum Asset Management, Doret Els, agrees. ‘It’s a good figure and it is below consensus. Last year in June the figure was 10,7 per cent.’However, I don’t foresee inflation going below 6 per cent this year, maybe towards the second half of next year. The double-digit wage negotiations and inflation expectations that exceed 8 per cent for the next two years will make it difficult for inflation to go below 6 per cent.’I foresee inflation remaining sticky around these levels for the rest of the year.’Investec economist Kgotso Radira says: ‘CPI inflation came out well below consensus estimates, driven by the scheduled surveys for housing utilities (rent) and household contents (domestic workers’ wages), with no recorded monthly increases in food prices.Downward pressure is likely to have come from food prices on a year on year basis.’Today’s outcome bodes well for a possible interest rate cut at the August MPC meeting. We still expect a 50bp cut in interest rates.’ – I-Net Bridge