According to Stats SA, average prices increased by 0.6% between June and July.
The food and non-alcoholic beverages index increased by 0.3% between June 2010 and July 2010 while the housing and utilities index increased by 3.0% mainly due to a 16.3% increase in electricity and other fuels.
The restaurants and hotels index decreased by 3.9% between June 2010 and July 2010, mainly due to a 15.4% decrease in accommodation (the 15.4% decrease excludes educational boarding fees).
Market consensus was that inflation would ease to 4%.
Nedbank expects inflation, its lowest level since July 2006, to remain below 4% in the next three months due the strengthening of rand, weak domestic and foreign price pressures as well as moderation in service inflation.
"Today's inflation figure strengthens the case for further monetary easing in September. The weaker growth picture, coupled with a subdued inflation outlook and a very strong rand will also weigh strongly on the decision to lower rates one last time this cycle," said the Nedbank group. The bank had predicted that CPI will come in at 3.8%.
"The figure is certainly below market expectations. Transport costs pulled inflation down because of a reduction in the petrol price. Food prices are also something to watch going forward. I would say we are fairly close to the bottom of the cycle. The numbers reflect weak consumer demand," said Standard Bank senior economist Dr Johan Botha.
Commenting on the MPC s' meeting Botha said: "It seems evidence is building up for a cut."
The Reserve Bank's Monetary Policy Committee will begin its two-day meeting on rates on 8 September.
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