Inflation edges higher in December

2010/01/27

Consumer price inflation (CPI) edged higher in December, rising above the SA Reserve Bank's inflation target ceiling, Statistics SA said on Wednesday.

December's CPI rose to 6.3 percent year-on-year from 5.8 percent year-on-year in November, according to the Pretoria-based agency.

This was in line with economists' forecasts.

André Roux, head of fixed income at Investec Asset Management said the CPI figure was far better than the Reserve Bank's expectation of 6.5 percent.

"Yes, it is above the target band, but that is largely because we had the unusually large drop of almost R2 in petrol prices in December 2008, so this is entirely a statistical base effect," Roux said in statement.

He said that underlying trends were very encouraging.

"December marks the second month of negative food prices and we are clearly seeing the beginning of food deflation.

"Underlying soft commodity prices have fallen sharply in recent months, hence we expect the trend in food prices to gather momentum."

Roux said the benefits of the strong rand for inflation were also coming through strongly now.

"Vehicles prices, for example, are down for the second month in a row and furniture prices are also on the decline."

In addition, he said several services items surprised on the downside.

"The only exception to this improvement is the hospitality industry, where prices appear to be accelerating. This will probably only get worse in the months to come, as it so obviously is a case of prices going up into the 2010 World Cup."

Roux expected the monetary authorities to ignore this trend, as prices would most certainly drop to more realistic levels after the event. He said inflation would remain outside the SARB's target band of three to six percent for January as well, "but again this will be purely a base effect".

After that, inflation should subside quickly towards the middle of the target band, Roux added.

"The Reserve Bank has a more cautious inflation forecast than this, so a good number like the one we had today means that they will have to revise their forecast down, thus raising the prospects of a rate cut in March." (Source: Sapa)