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ECONOMY: Inflation Expectations Decline


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The Stellenbosch-based BER reports inflation expectations in respect of 2010 fell by a further 0.6 percentage points (% pts) to 5.7% during 2010Q3. This is the first time since 2007Q4 that overall inflation expectations have fallen to below the 6.0% upper limit of the target range.

Average CPI inflation expectations for 2011 declined by 0.4% pts - from 6.5% in 2010Q2 to 6.1% in 2010Q3. This is the third consecutive quarter that inflation expectations in respect of 2011 declined.

After remaining unchanged at 6.8% in the last two surveys, inflation expectations in respect of 2012 declined to 6.4%.

Of the four social groups surveyed, analysts continued to be the only group to expect inflation to remain within the 3% to 6% target range over whole forecast period of 2010 to 2012. Since the previous survey, their inflation expectations in respect of both 2010 and 2011 declined by 0.5 % pts to 4.5% and 5.2% respectively. After remaining unchanged at 6.0% during the previous two quarters analysts revised their inflation expectations for 2012 downwards to 5.6%.

Business people expect inflation to average 6.5% during 2010 before increasing to 6.8% in 2011 and 7.1% in 2012. Although business executives have lowered their inflation forecasts since the previous survey, they are still the group with the highest inflation forecasts.

Trade unions downwardly revised their 2011 expectation by 0.3% pts to 6.4%. Inflation is expected to edge up to 6.5% in 2012. Along with business people, trade unions expect inflation to remain above the 6.0% upper limit of target range over the whole forecast horizon.

Similar to the other social groups, households also revised their inflation forecasts for 2010 significantly downwards, namely from 8.3% in 2010Q2 to 7.4% in 2010Q3. This is the largest decline between two consecutive quarters within the same year since 2003Q3.

The overall outlook for inflation improved with all the surveyed groups lowering their expectations over the entire forecast period (2010 to 2012). However, respondents expect inflation to bottom during 2010, before edging up during the next two years.

The SA Reserve Bank commissioned the BER to conduct an inflation expectation survey. The third quarter of 2010 survey of financial analysts, business executives and representatives of the trade union movement was conducted between 10 August 2010 and 7 September 2010 and the results computed on 8 September 2010. The fieldwork for the household survey was conducted between 6 and 18 August and the results processed on 9 September 2010.


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