Inflation in SA last month fell to its lowest level since October, official data showed yesterday, but news of a strong rise in retail sales in February dampened speculation that price pressures would remain muted.
Inflation retreated to 6% from 6,1% in February, a modest dip which nonetheless took the indicator back to the top of its official 3%-6% target range. It was the second decline in a row.
The figures suggest inflation may fall short of the Reserve Bank’s expectations in coming months, backing the case for it to keep interest rates steady for the rest of the year. The Bank has predicted inflation will average 6,5% during the second quarter - an estimate which is starting to look unrealistically high.
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"We see inflation moving broadly sideways over the remainder of the year," Cadiz Asset Management economist Adenaan Hardien said yesterday.
"We remain comfortable with our view that interest rates are likely to remain flat until the first half of 2013," he said.
Inflation first breached its target range in November last year. Normally this would trigger a rate hike, but the Reserve Bank has held interest rates steady at 30-year lows to support the economy’s recovery, still regarded as vulnerable.
Optimism about the inflation outlook was clouded by other figures from Statistics SA yesterday, which showed that retail sales rose 7,2% in February compared with the same month last year.
That was a substantial acceleration from an increase of 4,2% in January, and was well beyond market consensus forecasts for a rise of just 4,7%.
The question is whether the apparent recovery in the retail sector reflects the type of demand which will soon lead to "broad-based" inflation pressure - a trend which would then soon prompt the Reserve Bank to raise interest rates.
Stanlib economist Kevin Lings said he believed this was unlikely to materialise as rising prices for fuel, electricity, education fees, medical service costs and water costs were "systematically eroding" consumer spending power - the economy’s main engine.
Other economists agreed.
"There is no obvious indication of more generalised inflation pressures," Standard Bank economist Thabi Leoka said yesterday.
"South Africans may be shopping their way through slow (economic) growth but this can’t be sustained," he said.
The figures from Stats SA showed that retail sales fell 2,2% in February compared with the previous month, after declining 1% in January.
By the same token inflation, measured by the consumer price index, rose 1,1% last month after a 0,6% increase in February. The monthly rise in inflation was driven mainly by higher prices for alcoholic beverages and tobacco, petrol and education fees.
The slowdown in the annual increase in inflation stemmed largely from "base effects" - which refers to a favourable comparison with the same month last year.
Nonetheless, inflation for food and beverages and administered prices set by the government all fell year on year.
Food price inflation subsided to 8,9% from 9,6% in February - well below the peak of 11,6% recorded in November. It looks set to continue falling this year.
But volatility in oil prices and the rand may still put upward pressure on inflation in the months ahead.
This month, petrol prices rose by more than 6%, while the rand depreciated - a trend which raises the cost of imports.
Core inflation, which is closely monitored by the Reserve Bank, edged up to 4,4% last month from 4,3% in February.
The measure excludes food, petrol and energy prices and is the best indicator of underlying inflation pressures in the economy. "Underlying inflation remains relatively well contained, with a very modest upward bias, which will have to be monitored very carefully," Stanlib’s Mr Lings said.
Absa Capital said it believed that underlying inflation would rise to 5,5% by the end of this year, prompting the Bank to raise interest rates in the fourth quarter.
"Our view is supported by two years of strong consumption growth and anecdotal evidence in the retail sectors that higher prices of clothing, footwear and merchandise are set to be pushed on to consumers" over the rest of the year, Absa Capital said in a research note yesterday.
In a speech last month, Reserve Bank governor Gill Marcus said there were signs that inflation was becoming more "generalised", and may reflect the emergence of demand pressures.
A sudden surge in unsecured lending by banks - mainly personal loans - could reflect a buildup in demand backed by credit extension.
But the Bank’s deputy governor, Lesetja Kganyago pointed out this week that the overall pace of credit growth is not high enough for concern to be raised.
Inflation for goods measured in the consumer price index fell to 6% from 6,5% while services inflation nudged up to 5,9% from 5,8%. Goods and services each account for about half of the weight in the consumer price index.
A worrying aspect of the data is that it shows that inflation for the poorest South Africans is the highest, at 7,7%, while for high-income earners it stands at just 5,5%.
One of the reasons for the discrepancy is that the poor spend most of their income on food.