Nedbank: Consumer Inflation

22 Jun.

Nedbank Economic Commentary: Consumer Inflation May 2011.

• Consumer inflation rose well ahead of market expectations (4,3 % y-o-y), increasing to 4,6 % y-o-y in May, up from 4,2 % y-o-y in April.
• High food prices (up 1,7 % m-o-m), fuel prices (2,9 % m-o-m) as well as personal care items, were mainly responsible for the 0,5 % monthly increase.
• Past increases in international food and fuel prices are still expected to push inflation to the upper limit of the target band in the final quarter of 2011. Much now depends on whether global food and fuel prices, which appear to have halted their upward trend, will ease off in the coming months and whether the second round effects of inflation remain dormant. 
• The Governor has highlighted that the MPC would monitor the economy for any evidence of second-round effects. Although inflation is expected to rise above the 6 % target in the first quarter of 2012, the increase is forecast to be temporary, largely driven by international cost-push pressures.
• As a result, we believe the MPC is likely to continue with its wait-and-see policy until there is greater evidence of “more generalised inflation”, either due to second-round effects from higher commodity prices or price pressures emanating from robust domestic demand. Despite rising inflation, we still expect the Reserve Bank’s MPC to delay its first hike until early 2012, as an early interest rate increase would risk curbing the economic recovery.

Comment

Consumer inflation picked up more than expected in May, rising to 4,6% y-o-y, up from 4,2% in April, mainly as a result of higher food and fuel prices.

Food inflation continued to rise, increasing to 6,3% y-o-y in May, up from 4,8% in April. Over the month, prices rose by 1,7%, mainly as a result of higher prices of breads and cereals, oils and fats as well as vegetables.

Prices of durable goods fell over the month, declining by 0,1%, due to lower prices for vehicles and telecommunication equipment. Durable goods prices continued to decline on an annual basis, falling by 2,7% following a 2,6%.

The transport category rose by 0,7% m-o-m, mainly due to a 2,9% increase in the price of petrol as well as a 2,9% m-o-m increase in other running costs. Vehicle prices were unchanged over the month. Annual inflation in transport rose modestly to 3,8%, largely driven by petrol, which rose by 17,7% y-o-y.

Services inflation remained unchanged at 4,7% in May. …

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