Latest figures from Statistics South Africa show inflation slowing to 5.1% year-on-year (y/y) in March from 5.7% y/y in February 2010, despite a high survey month. Inflation at these levels was last seen in late 2006, and it is telling of low demand pressures in the economy. The monthly increase in headline inflation came to 0.8% month-on-month (m/m) from 0.6% m/m previously, with the main contributors being alcoholic beverages and tobacco (as increased government "sin taxes" were imposed), education, housing and utilities, transport costs, and miscellaneous goods.
Significance: Prices of public transport, rentals, education, domestic workers' wages, and vehicle insurance were surveyed in March, leading to an added contribution from these categories, but food prices saw another drop of 0.1% m/m following the previous month's 0.4% m/m drop. The record maize crop in South Africa will continue to benefit food prices in the coming months, albeit somewhat tempered by opportunistic increases in food prices during the FIFA World Cup tournament in June. Upward pressure from administered prices, which include municipal tariffs and electricity prices, will limit inflation's downward potential, while a turnaround in the exchange rate on the back of sovereign risk fears in Europe could pose a risk to the outlook. Nevertheless, IHS Global Insight expects inflation to reach a low turning point of around 5% on average in the third quarter of 2010, after which increased economic activity and upward trending commodity prices internationally will gradually lead to a moderate rising trend. Our interest-rate outlook mirrors this inflation trajectory. Given the global monetary cycle, steady albeit slow growth domestically, and rand uncertainty, we expect interest rates to stay at current levels until 2011, when a 50-basis-point increase can be expected early in the year.
