/ 24 June 2009

‘Inflation still a concern for consumers’

South Africa’s targeted consumer inflation slowed to 8% year-on-year in May, slightly above expectations, from 8,4% in April, official data showed on Wednesday.

Statistics South Africa said headline CPI inflation stood at 0,4% on a monthly basis in May compared with 0,5% the previous month.

From January, a revised and re-weighted CPI replaced CPIX — which stripped out mortgage costs — as the central bank’s targeted inflation measure.

According to Fanie Joubert, an economist at Efficient Group, ”It’s as we expected, it is slightly higher than the market consensus, but only marginally.

”It confirms that the general deceleration trend of inflation is still intact, but the level of inflation is still a concern for consumers.”

Mike Schussler, economist at Economists.co.za, said: ”Proves again that inflation is nowhere near where SARB would like to see it. By now we should have been under 6%, but we are unlikely to see it near that level for the next year or so.

”Inflation is certainly not in a good place. It is unlikely that we will get good inflation outcomes for the next few months. This is not good news for bonds or for rates going forward.”

Inflation targeting
Meanwhile, South Africa must not change its inflation-targeting framework and should return to fiscal prudence once the economy recovers to maintain market confidence, the Organisation of Economic Cooperation and Development (OECD) said on Wednesday.

The OECD said in its latest economic outlook that keeping investor confidence was a key challenge for the new government, given a recession and financing needs for a large current-account deficit.

”Continued fiscal prudence, which need not exclude additional stimulus if demand contracts further, will be critical,” it said.

”The inflation-targeting regime should be left in place, as it underpins monetary policy credibility and has already shown substantial flexibility.”

The government of President Jacob Zuma is under pressure from trade union and communist party allies for more populist policies, raising investor fears of a shift to the left.

They want spending boosted to create jobs and help the poor, are demanding more interest-rate cuts and for inflation targets to be scrapped.

Africa’s biggest economy slumped into its first recession in 17 years in the first quarter and is on course for a decline in yearly growth.

”The new government that took office in May 2009 must chart its policy course at a time of great economic and social challenges,” the OECD said.

”Markets are nervous about a possible resort to economic populism, while many supporters of the government are pressing for more activist policies to address unemployment and poverty.”

Zuma’s administration has stressed it has not abandoned its previous conservative policy stance, and while Finance Minister Pravin Gordhan has said he was prepared to debate inflation targeting, the framework remains in place.

The central bank has cut its repo rate by 450 basis points to 7,5% since December and is widely expected to drop it another 50 basis points on Thursday, even though inflation is still outside the 3% to 6% band.

The OECD said annual inflation, which stood at 8.0 percent in May, was likely to return to target in 2010.

The economy, it added, was seen contracting this year before policy stimulus, a global recovery and the impact of hosting the Soccer World Cup in 2010 lift it back to moderate growth.– Reuters, I-Net Bridge