Food contributes to below-expectation Feb CPI

CPI increased 0.6% month on month (m/m) in February, unchanged from February's figure, while core inflation came in at 4.3% y/y in February.

The food and non-alcoholic beverages index decreased by 0.5% between January and February.

Jeff Schultz, Absa Capital economist said that the 0.6% m/m fall stemmed largely from a 1.5% m/m fall in unprocessed food stuffs, while meat prices also gave back the full 1.8% m/m gain recorded in January.

Schultz said they continued to observe strong gains in the breads and cereals category however, at 0.8% m/m, owing to continued strong growth momentum in the local maize price, while prices of milk, eggs and cheese also continued to gain momentum.

While the two consecutive months of moderation in CPI for food did perhaps suggest a slightly lower 2012 food price trajectory than Absa Capital had previously envisaged, they still anticipated elevated food price growth in the coming months with CPI on food only meaningfully tapering off in the latter parts of 2012.

The transport index increased by 0.8% between January February, mainly due to a 34c/litre increase in the price of petrol, Stats SA reported.

Kevin Lings, Stanlib economist said a worrying component of inflation remained the petrol price.

"Unfortunately the petrol price rose by a further 28c/l in March and is forecast to rise by around 62c/l in April," Lings said.

The April rise, he added, comprised a 20c/l increase in the fuel levy, an 8c/l jump in the Road Accident Fund, a 4c/l pipeline charge and a 30c/l under-recovery on the petrol price.

"Despite these large monthly increases, we expect the annual rate of petrol inflation to actually ease during the year. This is largely due to base effects. Clearly the risk to the oil price is still to the upside, given the tensions around Iran," Lings said.

The health index increased by 4.1% between January and February, mainly due to a 6.4% monthly increase in medical services, while the miscellaneous goods and services index increased by 2.8% between the two months, mainly due to a 4.6% increase in insurance.

Carmen Nel, Rand Merchant Bank economist said that the latest inflation figures were supportive of their view that moderating growth and a strong rand were capping pricing power.

She noted, however, that there were still upside risks, which emanated largely from higher offshore oil prices, sticky international food prices and the elevated local maize price.

The stronger rand, lower than expected CPI print and revision to the electricity tariff increase for 2012/13 should prevent another upward revision to the South African Reserve Bank's inflation forecast, RMB said.

"Our base case view is still that the SARB will hold off on rate hikes until 2013, unless it is convinced that the global and local economies are sustainably strong enough to withstand elevated food and oil prices alongside the removal of policy accommodation."

Nedbank economists expected the SARB's monetary policy committee (MPC) to maintain its accommodative stance until the downside risks to economic growth faded more compellingly in late 2012 and early 2013.

"However, the risk to the interest rate forecast is starting to shift to the upside as inflation remains outside the target band," they said.

Lings said there were still some upside risks to SA's inflation.

These, he said, included a range of administered prices, including electricity, water and fuel, as well as any rand weakness.

"The extent to which these price pressures will impact core inflation will be heavily influenced by the strength of the domestic economy, which is currently growing at a steady pace, but is not sufficiently vibrant for companies to easily pass on cost increases," Lings said.

Peter Attard Montalto of Nomura International forecast CPI at between 6.0% and 6.2% for next two months before properly entering target at 5.7% in June, and ending year around 5.3%.