/ 24 February 2010

Statistics SA: Inflation eases in January

Consumer Price Inflation (CPI) eased to 6,2% in January, down from 6,3% in December, Statistics SA said on Wednesday.

Some upward pressure over the month came from services inflation particularly, insurance, financial and funeral services which rose by 0,9 % month-on-month, 3,1% month-on-month and 2,7% month-on-month respectively.

“The annual pace of decline in all three categories continued to moderate, as companies pushed through lower price increases this year in comparison with last year,” Nedbank said.

Food prices rose strongly over the month, due mainly to seasonal factors, increasing by 0,8%.

“Most of the upward pressure came from unprocessed goods, which rose by 1,1 %, particularly fruit and meat,” Nedbank said.

On an annual basis, food prices continued to moderate, easing to 1,6 % from 2,8 % in December.

According to Nedbank, weak household demand, combined with the previous rand strength, continued to put downward pressure on prices of durable and semi-durable goods.

New vehicle prices fell over the month, declining by 0,4%, following a 0,2% month-on-month decrease in the previous month. Over the year, car prices rose by 1,7%, down from 2,3% in the previous month.

Books, newspapers and stationery fell by 2,2% over the month, while the cost of telecommunication equipment was 1,7% lower.

Nedbank said inflation was expected to fall back within the target range next month and remain below six percent for the rest
of 2010.

“Nersa’s decision to grant Eskom a 24,8% tariff increase this year is welcome news from an inflation perspective, although it will still contribute roughly 0,45% age points to inflation, in comparison with 0,65% age points had Eskom been granted a 35% increase.”

The decision also made it less likely that inflation would breach the target band again this year.

“In addition to the direct impact on inflation, some second round effects are still likely, although the extent to which retailers can push through higher prices will be dependant on the health of the household sector,” Nedbank said.

Weak domestic demand was among the factors helping to push inflation of durable and semi-durable goods lower during the latter half of last year.

“The trend is expected to continue this year, particularly if the rand regains some ground.

“Discounting, in order to entice still hesitant consumers into the shops, will also help to put downward pressure on the prices of discretionary items.”

According to Nedbank, any further weakness in the rand or indication that it was likely to trade significantly weaker over the coming months would reduce retailers’ incentive to push through previous costs savings to the consumer.

Turning to the implications of the CPI figure, Nedbank said demand-side inflationary pressures in the economy were likely to stay subdued during the remainder of the year.

Despite this, inflation was not expected to fall much below five percent.

“This, combined with Tuesday’s GDP figures, which suggests that the economy is on the mend, reduces the likelihood of a further rate cut.

“However, the recovery is driven more by demand from abroad than a recovery in domestic conditions.”

Nedbank said that as a result, the SA Reserve Bank’s Monetary Policy Committee (MPC) would probably be reluctant to hike rates too quickly as there was unlikely to be much demand pressure on prices even though the risks to inflation were likely to increase towards the end of the year.

“We therefore expect that the MPC will keep interest rates on hold throughout 2010,” Nedbank added. — Sapa