Consumer inflation up

SA consumer inflation rose slightly more than expected in March to 4.1 percent year-on-year with food inflation now up at 5.1 percent.

The increase in South Africa's consumer price index was 4.1% year-on-year in March from 3.7% in February, unchanged from January, Statistics South Africa (Stats SA) said today.

The consumer price index, which is used by the South African Reserve Bank (SARB) for its inflation target, was 1.2% month-on-month (m/m) from 0.7% in February.

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ANALYSIS BY Kevin Lings, Economist at Stanlib

During March 2011 there were a number of key factors impacting inflation. This included a large 1.4%m/m increase in food prices (see discussion below), a 3.7%m/m rise in alcoholic beverage costs, a 1.5%m/m increase in house rentals, a 8.6%m/m rise in education fees (annual measurement of education inflation), and a 4.8%m/m jump in petrol costs (which reflects the impact of the higher oil price. A similar rise will occur next month given the recent 54c/l increase in the petrol price).

As mentioned above, there was a fairly substantial rise in food inflation during March of 1.4%m/m. On a three month annualised basis, food inflation is up at a worrying 15.6%. In addition, the increase in food prices during March was very broad based with every single category of food inflation rising.

As we have highlighted over the past number of months, international food prices have risen dramatically since the middle of 2010 and according to the Economist food prices index, are still up a staggering 40%y/y over the past year; in Dollar terms. Furthermore, the rise in international food prices has also been extremely broad-based with almost every category of food up sharply.

This has already led to higher food inflation in numerous countries and is expected to impact SA more forcefully over the coming 12 months. Consequently, we still expect SA food inflation to breach 10%y/y by year-end; based on some recent and excellent work done by Prof Johan Willemse from the University of the Free State. As would be expected, this will have a significant impact on SA’s overall inflation rate in 2011/2012 (food has a weight of 14.27% in the index).

CPI excluding food and fuel remained well within the inflation target at 3.4%y/y, but rose by 1.0%m/m in March 2011. Services inflation ticked marginally higher to 4.6%y/y from 4.5%y/y in February.

Looking ahead to 2011, there are a number of clear upside risks to SA inflation. These include higher food inflation (see discussion above), and higher energy prices. The extent to which these price pressures will impact on inflation will also be heavily influenced the Rand exchange rate.

There is little doubt that the relative strength of the Rand in 2010 cushioned SA from some potentially damaging price pressure, but this is likely to change in 2011/2012. Domestically, further electricity price hikes, coupled with other service costs and administered price rises (including water costs) as well as the concerning increase in wage demands could also push SA inflation higher during late 2011 and early 2012.

All of these factors clearly suggest that SA has moved past the low point in the current inflation cycle and that there is some meaningful upside risk to inflation in 2011/2012, driven mostly by cost push factors.