Inflation breaches Reseve Bank target of 6%

The Consumer Price Index (CPI) remained at 6.1% in December, Statistics South Africa (Stats SA) said on Wednesday.

“The headline CPI annual inflation rate in December 2011 was 6.1%. This rate was the same as the corresponding annual rate of 6.1% in November 2011,” noted Stats SA.

Market expectation was that it would rise to 6.2% year-on-year.

“Inflation is expected to remain elevated off a low base, hovering above the Reserve Bank’s upper 6% limit for much of 2012. The upward pressure will mainly come from a weaker rand combined with further increases in food, fuel and administrative prices. However, subdued domestic spending and excess production capacity should help prevent any significant secondary inflationary effects from developing by limiting retailers’ pricing power,” said Nedbank economists.

CPI breached the Reserve Bank’s target range of between 3% and 6%.

In the new year, key risk will be an unpredictable global economy particularly the potential impact of a weak Europe on international commodity prices, local growth, job security and the rand.

Standard Bank and Bloomberg consensus had anticipated a print of 6.3% year-on-year.

Over the month of December food prices, housing and utilities increased. According to Stats SA, the official average annual inflation rate was 5% in 2011 – coming in higher than 2010’s annual inflation rate of 4.3%.

“The rising inflationary pressures, with inflation remaining above the upper limit of the target for a protracted period, will likely sway the [South African Reserve Bank’s] Monetary Policy Committee  members to keep the repo rate on hold at the conclusion of tomorrow’s meeting,” said Standard Bank in a research note.

The Committee, following its first meeting of the year, will make public on Thursday its decision on whether to increase or reduce the repo rate, which currently is at 5.5%.

“While the door still remains open for consideration for a cut in rates, on the back of a weak global and domestic growth outlook, the SARB has recently reiterated its commitment to keeping inflation under control. We therefore maintain our base case scenario that the SARB is likely to keep the repo rate unchanged at 5.5% through 2012,” said Standard Bank.