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Inflation accelerates as expected in July

| Economic factors

Inflation accelerated as expected to 5% in July compared with a year ago from 4.7% in June, Statistics SA data showed.

The 5%, the highest inflation rate since December last year, was mainly due to higher food, petrol, electricity and water prices. The petrol price rose by 44c/l in July.

"CPI inflation in July rose mainly on a 41c/l increase in the petrol price and a 12.7% increase in the electricity tariff. Demand-led inflation is modest, reflective of weak economic growth. By the turn of the year food price pressure could rise, feeding into the CPI inflation peak of around 6.5% year on year in the first quarter of 2016 as a consequence of exogenous price pressures," said Investec chief economist Annabel Bishop.

Inflation would continue rising to peak at around 7% early next year, said Macquarie Securities SA economist Elna Moolman. She added that despite the rising inflation trajectory, the Reserve Bank was likely to hike rates again only next year.

The Bank raised rates by 25 basis points in July amid concern about rising inflation. It expects inflation to breach the 3%-6% target band in the first and second quarters of next year on factors such as electricity tariff increases.

The Bank was likely to hold off on raising rates again this year on a "less dramatic run up in inflation" combined with a weak economic growth outlook, Bank of America Merrill Lynch SA economist Matthew Sharratt said. Mr Sharratt expected the next interest rate increase of 25 basis points in January next year.

Stats SA said that prices on average increased by 1% between June 2015 and July 2015.

The food and nonalcoholic beverages index increased by 0.1% between June and July, while the annual rate increased to 4.4% from 4.3%.

The housing and utilities index increased by 3.1% between June and July mainly due to a 9.8% increase in water and other services and an 11.2% increase in electricity and other fuels.

Core inflation, which strips out food, fuel and energy prices, slowed slightly to 5.4% year on year in July from 5.5% in June. MD Dennis de Jong said: "Today’s figures showing a sharp inflation rise will be a concern to Finance Minister Nhlanhla Nene, but far more worrying is the currency tussle between Beijing and Washington. SA has significant current account deficits, and an interest rate rise by Federal Reserve chairwoman Janet Yellen will be strongly felt.

"The rand has continued to weaken against the dollar and inflation is now edging towards the upper limit of the 6% level set by the South African Reserve Bank. Nene and co will need to monitor proceedings very closely over the coming months, when the real effect of China’s slowdown on the South African economy should reveal itself."

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