June 16, 2021/Cordros Report
In our April inflation report (see report: A Transitory Moderation in Food Prices but Upside Risks Remain Elevated), we expressed that the year-on-year inflation rate will moderate given our expectation of a slower rise in food prices amidst a subdued growth in the core basket. True to our prognosis, the recently published data by the National Bureau of Statistics (NBS) showed that the headline inflation moderated for the second consecutive month to 17.93% y/y (April: 18.12% y/y). On a month-on-month basis, the headline inflation increased by 4bps to 1.01% m/m – tracking below the 2021 average of 1.32%. The outturn is 8bps lower than Cordros’ estimate (18.01% y/y), with the deviation primarily seen from the core basket and 27bps lower than Bloomberg median consensus estimate (18.20% y/y).
After the positive surprise in April, food inflation resumed its uptrend in May in line with our expectation. For us, the increase in food prices was due to the combined impact of (1) resumption of food demand as the people depleted their Ramadan-induced food reserve, (2) limited supply of food produce to the market given the ongoing planting season and (3) pre-existing supply chain constraints. Accordingly, food inflation rose 1.05% m/m (April: 0.99% m/m). The breakdown provided showed that price increases across Processed food (+12bps) and Imported food (+1bp) were enough to offset the decline in the prices of Farm produce (-13bps).
Elsewhere, core inflation increased by 42bps to 13.15% y/y in May (April: 12.73% y/y). We believe the preceding reflects the (1) increase in PMS (+27.2% y/y) and diesel prices (+5.8% y/y) and (2) increased demand for transport services that accompanied the enhanced movement of people compared to a year ago. On a month-on-month basis, the core inflation masked a three consecutive month of decline as it increased by 25bps to 1.24% m/m – the highest in four months. We observed marginal prices increases across the Processed food (+12bps), Education (+3bps), Restaurants & hotels (+3bps) and HWEGF (+1bp) components.
Overall, we expect the headline inflation to increase by 12bps to 1.13% m/m, with the favourable base effect from the prior year translating to a y/y print of 17.83%.
