Investment banking firm Investec said on Wednesday that the increase in consumer price inflation, measured by the consumer price index (CPI), was comfortably below market expectations of 5.6% year-on-year.

The CPI increased moderately by 0.1% during December to a rate of 5.4% year-on-year, Statistics South Africa reported on Wednesday, adding that, on average prices increased by 0.3% between November and December. 

Investec pointed out that, during the first quarter of this year, should CPI inflation remain in the target band and continue to surprise market expectations to the downside in its intensity, the inflation environment might facilitate a lowering in inflation expectations.

“As expected, the main contributions to both the monthly and yearly CPI in December stemmed from the housing and utilities and the transport categories,” Investec said.

Housing and utilities contributed 0.2% to the headline and 0.3% to the month-on-month increase, while transport contributed 0.1%.

In annual terms, housing and utilities made up 1.3% of the 5.4% year-on-year rise and transport added 1%.

“In December, inflation in these categories was driven primarily by the 17c/ℓ petrol price hike and December was a measurement month in which the prices of rentals and domestic workers wages are surveyed,” Investec explained.

Further, in December, the increase in food prices at the consumer level, eased to 3.5% year-on-year from 3.7% year-on-year in November, marking the slowest yearly increase rate in nearly three years.

“This is reflective of the declines in global food prices and, to some extent, of domestic pricing competition,” Investec said.

Meanwhile, for 2013 as a whole, inflation averaged 5.8% as opposed to 5.7% in 2012.

Investec stated that this was in line with the South African Reserve Bank’s (SARB’s) forecast.

“The SARB monetary policy committee (MPC) meets next week to deliberate on interest rates and the exchange rate is likely to be highlighted as an upside risk to inflation. Since the SARB MPC last met in November, the rand weakened a further 7% against the US dollar.

“However, the effects of a weakening domestic demand environment and, concurrently, suppressed growth in private-sector credit extension, will contribute to keeping inflation within the target band in 2014 and 2015. As such, interest rates are likely to remain unchanged in 2014 as economic growth remains sluggish and downside risks are yet to dissipate,” Investec said.