Johannesburg — Consumer price increases for last month below consensus forecast of 4,5%.

INFLATION rose slower than expected last month, spurring market speculation of another interest rate cut, but analysts believe longer-term price pressures rule this out.

Compared with the same month last year, consumer prices rose 4,2%, slowing from 4,6% in May and well below consensus forecasts of a 4,5% increase.

During the month itself, prices were unchanged compared with May, Statistics SA said yesterday.

The data make it very likely that inflation will subside below 4% in the next couple of months, lower than the Reserve Bank and most economists had predicted.

But it is expected to climb near the top of its 3%-6% official target by the end of next year.

Steep wage hikes demanded by trade unions, higher administered prices set by state-owned entities and unfavourable "base effects" mean that the downturn in inflation will not last.

That means the Bank is unlikely to cut interest rates again this year, although it is likely to postpone raising rates for longer.

"On balance, we think the Reserve Bank will keep rates on hold for the remainder of 2010," said Stanlib economist Kevin Lings. "But the window of opportunity to cut rates is still open."

Government bonds rallied on the benign price data, with yields on the benchmark due in 2015 falling 10 basis points to 7,57%.

Forward rate agreements in local money markets are pricing in a 50-50 chance that the Bank will cut its repo rate by half a percentage point to 6% at its next policy meeting in September.

The rand's appreciation over the past few weeks backs this view, as it helps to curb price pressures by making imports less costly.

The volatile unit was trading at R7,33 to the dollar yesterday, near a three-month peak and just off the level it was when the Bank last cut rates in March.

Yesterday's data showed prices for food and beverages fell 0,4% last month, and rose just 0,7% compared with a year ago - good news for SA's poor majority.

Food inflation is at a record low, and compares with a peak of 18,8% in the middle of 2008.

Transport prices also fell, by 0,8% in the month, mainly due to a lower petrol price.

Hotel prices soared 17,6% and were 26% up on a year ago - clearly the result of demand from an influx of foreign tourists visiting for the Soccer World Cup.

But there were no other big inflation increases stemming from the event, as many had feared.

Restaurant prices rose a modest 0,3% in the month, while air fares dropped 3,3%.

Overall goods inflation fell 0,5%, putting the annual rise at just 2,6%. But services inflation was sticky at 6,1%, buoyed mainly by higher electricity and water tariffs - a trend set to carry on.

The weight of goods and services is split roughly evenly in the consumer price basket.

Bank officials and analysts have repeatedly said that pay hikes well above inflation will push it higher in the coming months if productivity does not increase.

For private companies, higher wages mean there is less scope to employ more people - and will lead to job cuts as costs climb.

The Treasury has said it must curb pay hikes this year to fund improvements in health, education and other services. The government's wage bill has doubled to R259bn in the past five years.

But pleas for restraint from unions have fallen on deaf ears.

Public service unions are set to go on strike to support a demand for an 8,6% pay increase, two percentage points above the official offer. The first stoppage is set to begin today.

Analysts say it is difficult to measure the effect on inflation of high pay increases, which are out of step with the world trend after last year's downturn. "In terms of general prices, the key input cost is labour," said Cadiz African Harvest economist Adenaan Hardien. "Administered prices have a more direct impact on consumer prices but are less important in terms of output prices." When demand was weak, companies would take higher input costs "on the chin", but when it picked up they would pass them on to consumers, he said.

Figures on the economy will be the key to whether the Bank cuts interest rates again.