Consumer Price Index drops to 5.5

The Consumer Price Index (CPI) for all urban areas in June 2013 came out at 5.5% year-on-year, Statistics SA said on Wednesday.

This was 0.1 of a percentage point lower than the corresponding annual rate of 5.6% in May 2013.

Investec group economist Annabel Bishop said in a statement this was well below the consensus expectation, as demand remained weak in the economy.

However, the petrol price rose by 84c/l in July, meaning that inflation was likely to jump to 6% in that month, and then to 6.4% year-on-year in August, as another petrol price increase of around 32c/l occurred.

“Inflation is then likely to fall back within target in September as base effects wear off and demand pressures in the South African economy remain subdued.”  The petrol price had been driven by rand weakness, but the domestic currency had dropped below the key resistance level of R9.80 to the US dollar, and would now target R9.55 to the US dollar before dropping to the next level of R9.25 in August.

The currency’s strengthening could result in a petrol price cut, as oil prices were not expected to rise substantially this year, which would aid the return of CPI inflation to 5.5 percent year-on-year by October.

“We continue to expect no interest rate hikes this year or next as the South African economy is too weak to stomach any monetary tightening and the very temporary breach of the inflation target cannot be prevented by higher interest rates as it is driven by exogenous factors [rand weakness],” Bishop said.