November 16, 2021/CSL Research

In line with our expectation, the Consumer Price Index (CPI) data released by the National Bureau of Statistics (NBS) revealed that headline inflation further moderated by 64bps to 15.99%, making it the seventh consecutive month of decline. Without a doubt, the current disinflation continues to see favourable support from the high base in the corresponding period last year and not necessarily improved market conditions, as the inflation downtrend does not match current realities. Nonetheless, the headline inflation (15.99%) in October is coming below the 1-year average inflation rate of 16.96%. Specifically, the food inflation tapered by 123bps, and the core basket was down by 51bps. Similarly, month on month, inflation was down by 17bps to 0.98%.

At an 11-month low, food inflation was down to 18.34% in October from 19.0% recorded in September. On a m/m basis, the food basket declined by 35bps to 0.91%, which we believe benefited solely from the main harvest season in October. In the same vein, the core inflation decreased by 51bps to 13.24% y/y in October. Despite the moderation, all items that make up the core basket recorded an increase with the price of utilities (gas & fuels), lubricants, vehicle spare parts and transport-related costs being the highest. In terms of utilities such as gas, the rise of Liquefied Petroleum Gas (LPG), widely used by the populace, has continued to rise.

Looking ahead, we project inflation will maintain its descent throughout the year, supported by the high base in the prior period. The government sets 13.0% as the inflation target for 2022. We believe the current trend in the inflation rate will give the MPC committee some comfort to maintain a HOLD on the policy rate at the last MPC meeting expected to hold on 22 and 23 November. However, as we approach the festive season, considering expectations of increased demand, we expect an increase in monthly inflation reading for the last two months of the year.