Inflation falls as demand under control

Tendani Mantshimuli, consumer economist.  pic MARIANNE SCHWANKHART 26.06.09. © Sunday Times.
Tendani Mantshimuli, consumer economist. pic MARIANNE SCHWANKHART 26.06.09. © Sunday Times.

INFLATION dropped for the third month in a row to a near four-year-low last month as consumer demand remained subdued.

Statistics South Africa said yesterday consumer price inflation for March was 5,1percent, from 5,7percent in February - the lowest level since July 2006.

This was 0,6 of a percentage point lower that February. However prices increased by 0,8percent between February and March.

Inflation is now firmly within the SA Reserve Bank's 3 to 3percent target bank. It has slowed sharply since hitting a peak of nearly 14percent in mid-2008, thanks largely to a drop in food prices. However, concerns remain about the knock-on effect of a 25percent increase in electricity prices and higher fuel costs.

Liberty Life consumer economist Tendani Mantshimuli, pictured, said inflation was in line with market consensus.

She said: "The question is what the Reserve Bank will do if the CPI continues on its current trajectory."

Reserve Bank Governor Gill Marcus warned last week that repo rate, currently at 6,5percent, was likely to remain flat for "some time".

"They will keep the interest rate where they are for a longer period, so that they don't have to readjust when inflation rises again," Mantshimuli said.

Economists agreed that the current inflation figures were unlikely to motivate the Bank to cut rates.

Nedbank economist Carmen Altenkirch said inflation would fall below 5percent in May and pick up slightly during the remainder of the year.

"The strength of the rand combined with weak domestic demand will continue to put downward pressure on durable and semi-durable goods inflation," Altenkirch said.

She said demand created by the World Cup would place pressure on prices as companies in the hotel, restaurant, general entertainment and travel industry sought to take advantage of the influx of tourists. - Additional reporting by Reuters