/ 21 September 2011

Inflation expected to speed up by the end of the year

Inflation will more than likely head out of the South African Reserve Bank’s target band of 3-6% by the end of 2011, economists told the Mail & Guardian on Wednesday.

Figures released by Stats SA indicated South Africa’s consumer price index to be 5.3% in August — unchanged year-on-year.

There was however a slight increase of 0.2% month on month for the same period.

The stagnancy in inflation surprised economists, who predicted CPI would rise marginally to 5.5%.

“This still doesn’t change the prediction that inflation will rise and break out of the target band by December and stay out of the target range until midway through 2012,” Absa Capital senior economist Gina Schoeman told the M&G.

The Reserve Bank adopted a formal inflation-targeting policy framework in 2000, in the hopes of controlling inflation levels.

This will be the first time the CPI headline marker moved out of the target range since January 2010 when it was recorded at 5.2%.

Since then CPI has yo-yo’d within the target range, slipping to a low of 3.2% in September 2010.

This all translates into possible pressure being placed on South Africa’s consumers as it will eat into their value of their income spending power.

But for the moment it would seem the Reserve Bank will resist moving on interest rates despite any potential inflation pressures.

“Regardless of a possible move out of the target band, we see a lot of tolerance from the Bank when it comes to inflation, as consumer spend for now remains sustained,” Schoeman added.

This view is reinforced by a senior economist at Standard Bank,Shireen Darmalingam, who believes inflation will move upwards but it won’t affect rates immediately.

“Increases in the cost of petrol will weigh in on consumers for moment, but if anything we would predict a rate cut due to the deterioration of domestic growth. This wouldn’t happen immediately though, perhaps in December,” Darmalingam said.

Stats SA reported second-quarter gross domestic product in August to be 1.3%, lower than the expected 1.6 %, following first-quarter growth of 4.5%.

These views come a day prior to the end of the Reserve Bank’s recent Monetary Policy Committee meeting.

An announcement on any change to policy, particularly regarding interest rates will be made on Thursday afternoon in Pretoria.

It is widely expected rates will remain unchanged at 5.5% — the lowest they have been in 30 years.