Consumer inflation has eased, but the figure is still a little higher than that expected by economists.

According to Statistics SA on Wednesday, consumer inflation eased in May to eight percent year-on-year from 8.4 percent in April.

Polls conducted among economists by Reuters and Bloomberg both put inflation for May at 7.9 percent year-on-year.

According to Nedbank Group's economic unit, consumer inflation was still proving to be very sticky, but on the positive side, inflation was now below where it was in January 2008.

"CPI fell less than expected in May, mainly due to increases in the prices of food, cars and household goods.

"International food prices have continued to rise, which probably goes some way to explain the increase in food prices recorded over the past few months," Nedbank said.

Inflation are expected to ease

It added that inflation was expected to ease over the coming months due to base effects, following the sharp run up in commodity prices last year and their subsequent decline.

However, inflation could remain sticky, particularly if retailers did not respond to weakening demand by cutting prices, Nedbank said.

The inflation outlook would depend for a large part on changes in food prices over the next few months.

"Excluding the modest decline in food prices in February, food prices have continued to rise every month, despite lower international food prices and much weaker demand for non-durable goods," Nedbank said.

More recently, international food prices had begun to march upwards again, making it unlikely that consumers would see lower food prices in the short-term.

"Additionally, our monthly snap survey of prices points to continued price increases by the key retailers during June," Nedbank said.

Furthermore, services inflation, which tended to be backward looking, might still rise this year reflecting last year's higher inflation.

Contraction in consumer spending

"However, the contraction in consumer spending suggests that insurers, hoteliers and restaurateurs may have to revise plans to increase prices much further this year," Nedbank said.

Turning to the implication's of May's consumer inflation data, Nedbank said that although disappointing, the figure did not change its interest rate view.

"The Reserve Bank will continue to look beyond the next few months' inflation figures and focus on the medium-term inflation outlook as well as the severe contraction in domestic economic activity.

"With the extent and duration of the global and local downturn remaining uncertain, the Monetary Policy Committee will continue to cut interest rates in order to provide the domestic economy with some support against the global recession."

Nedbank forecast that the prime rate would fall to 10.5 percent after the conclusion of the MPC meeting at the SA Reserve Bank on Thursday.

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