July 16, 2021/Cordros Report
In line with our expectation of the impact of favourable base effects on consumer prices, recently released data from the National Bureau of Statistics (NBS) showed that the headline inflation moderated for the third consecutive month to 17.75% y/y – suggesting that the inflation rate for the year might have peaked in March (18.17% y/y) barring no further shocks to prices. The moderation in inflation was due to the broad-based slowdown across the food (-45bps to 21.83% y/y) and non-food (-6bps to 13.09% y/y) baskets. On a month-on-month basis, the headline inflation increased by 5bps to 1.06% m/m – below the 2021 average of 1.27%. The outturn is 8bps lower than Cordros’ estimate (17.83% y/y) and 5bps less than Bloomberg median consensus estimate (17.80% y/y).
Food inflation maintained an uptrend as it increased by 6bps to 1.11% m/m (May: 1.05% m/m) – the highest since March 2021 (1.90% m/m). In addition to the pre-existing structural challenges, we attribute the increase to the combined impact of (1) ongoing planting season across the country and (2) rainy season in the Southern parts of the country. Accordingly, the breakdown provided showed that the 42bps m/m increase in the prices of Farm produce (96.0% of food basket) outweighed the marginal decline in the prices of processed food (-5bps to 1.07% m/m).
Although Transport prices (+9bps to 15.03% y/y) remain elevated compared to the prior year, core inflation moderated by 6bps to 13.09% y/y as the HWEGF (10.11% y/y vs May: 10.11% y/y) sub-basket remain stable while the health (-7bps to 15.76% y/y) sub-basket moderated for the second consecutive month. Notwithstanding, we note that price pressures were most significant in Clothing & footwear (+35bps to 13.86% y/y), Furnishings & Household Equipment Maintenance (+34bps to 13.25% y/y) and Recreation (+21bps to 12.53% y/y).
On balance, we look for a m/m headline inflation reading of 1.06% in July, with the favourable base effect from 2020 translating to 22bps moderation in y/y headline inflation to 17.54%.
