Figures released by Statistics SA (StatsSA) showed that prices slowed mostly for transport, food and miscellaneous goods and services.
Core inflation, which excludes food, non-alcoholic beverages, and energy, decreased to 4.5% year on year - the lowest rates since July 2012.
However, the decelerating inflation is expected to be overshadowed by fiscal deterioration and vulnerability to further rating downgrades that are expected to close the door on further rate cuts this year.
William Jackson, a senior emerging markets economist at Capital Economics, said the inflation outlook put the central bank in a bind.
Jackson said he expected the SA Reserve Bank’s Monetary Policy Committee (MPC) meeting tomorrow to be hawkish.
“With core price pressures softening and the economy showing fresh signs of weakness, we think policymakers will look through any energy driven rise in headline inflation and the rate hikes now priced into the market for the next few months seem unlikely,” Jackson said.
The MPC will decide on its benchmark repo rate later on today. Since its last meeting in September, the rand has weakened sharply while international oil prices have surged and domestic agricultural prices have risen.
StatsSA said the favourable grain supply situation and a consequent steep decline in grain prices have contributed to the contraction in bread and cereals of 3% year on year and the slowdown in dairy inflation to 2.7%. Meat price inflation stabilised, albeit at an elevated level, at 15.5% year on year in October after six months of accelerating price inflation.
Kamilla Kaplan, an economist at Investec, said while inflation eased in October, it was likely to increase to 5.7% next year and reach 5.8% in 2019 on the back of a strengthening global cycle and a further lift in commodity prices.
“The SA Reserve Bank is likely to reiterate that the balance of risk to the inflation profile remains on the upside. The risks include the rand exchange rate, the pace of global monetary policy normalisation and electricity tariffs,” Kaplan said.
The rand strengthened more than one percent on the news that inflation had eased, but remained jittery ahead of tomorrow’s year-end credit rating review by both Moody’s Investor Services and S&P Global Ratings.
Sanisha Packirisamy, an economist at Momentum Investments, said although inflation moderated in recent months and had tracked comfortably within the target range, the current environment had created additional challenges for monetary policy.