CPI rises above expectations

"The headline CPI annual inflation rate in May 2011 was 4.6%. This rate was 0.4 of a percentage point higher than the corresponding annual rate of 4.2% in April 2011," said Stats SA.

Market expectation was that CPI would rise to 4.3% year-on-year. On average, prices increased by 0.5% between April 2011 and May 2011 with high food and fuel prices and personal care items being mainly responsible for the monthly increase.

Global fuel, food prices key

Nedbank economist Carmen Altenkirch said past increases in international food and fuel prices are still expected to push inflation to the upper limit of the target band in the last quarter of the year.

"Much now depends on whether global food and fuel prices, which appear to have halted their upward trend, will ease off in the coming months and whether the second round effects of inflation remain dormant."

Second round effects on inflation stemming from higher energy and food prices have so far remained dormant, with semi-durable and durable goods inflation still well contained by a strong rand and retailers' lack of pricing power.

Inflation expected to increase... temporarily

"The Governor [Gill Marcus] has highlighted that the MPC would monitor the economy for any evidence of second-round effects. Although inflation is expected to rise above the 6% target in the first quarter of 2012, the increase is forecast to be temporary, largely driven by international cost-push pressures," said Altenkirch.

The bank believes the MPC is likely to continue with its wait-and-see policy until there is greater evidence of "more generalised inflation", either due to second-round effects from higher commodity prices or price pressures emanating from robust domestic demand.

In May, the Reserve Bank kept the repo rate unchanged at 5.5%.