May 19, 2022/United Capital Research

At the start week, the National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) report for Mar-22. According to the report, the headline inflation climbed further by 90bps to settle at 16.8% y/y in Apr-22, from the previous print of 15.9% y/y in Mar-22, which is 12bps higher than our forecast of 16.7%. 

Across the sub-indices, the composite food index continued northward, climbing 117bps to settle at 18.4% y/y in Apr-22 vs its 17.2% y/y print in Mar-22. On a m/m basis, the food sub-index climbed 2.0% in Apr-22, up 1bps from 1.99% in Mar-22. The rise in food inflation is reflective of rising input costs (fertilisers & seeds) and the end of the harvest season, both of which have contributed to weaker food supply and, consequently, higher prices.

Notably, we highlight the Easter and Ramadan festivities jolted food demand during the month, creating some demand-side pressure on food prices. core inflation sub-index rose 26bps in Apr-22 to print at 14.2% y/y vs its 13.9% y/y print in Mar-22. On a m/m basis, the core sub-index rose 1.2%, reversing the prior month’s surprise decline. The sudden increase in core inflation reflects the basket now accounts for the recent surge in energy costs and the pass-through impact on the transportation cost and other utilities. All the components of the core inflation basket trended higher m/m.

 The uptick in the headline inflation rate remains a crucial concern for the local economy. Firstly, we are taking a cue from key global counterparts. We acknowledge that inflation will be a significant deterrent to household income. Abroad we have seen major global markets such as the US and UK hike rates to curtail inflation.

However, locally we expect the MPC to continue with their “wait and see” approach and expect them to continue to focus on growth. We expect higher energy costs to be a significant driver of higher inflation in May and the rest of the year for the core inflation component. We expect the impact on y/y increase in core inflation will be broadly magnified. Combining the effects of planting season supply dearth, higher fertiliser & farm implements prices, and an expected surge in imported agricultural items (including locally produced substitutes), we expect food inflation pressures to remain elevated through the rest of 2022. For May, we project headline inflation will surge to 17.4%, reflecting pressure from energy cost, low baseline for headline inflation, and supply-gap driven food price increase.