September 15, 2022/Cordros Report
In our July inflation note (see report: Unfavourable Base Effects to Fan Higher Headline Inflation), we expected consumer prices to maintain their uptrend and settle at 20.52% y/y in August, given the troika impact of (1) unfavourable base effect from the prior year, (2) lingering spillover impact of rising transport cost, and (3) blend of currency and energy cost pressures. True to our prognosis, recently released data by the National Bureau of Statistics (NBS) showed that the headline inflation increased by 88bps to 20.52% y/y in August (July: 19.64% y/y). The last time consumer prices were around this level was in September 2005, when the inflation rate settled at 24.32% y/y. Decomposing the breakdown, price pressures were significant across the food (+110bps to 23.12% y/y) and core (+94bps to 17.20% y/y) baskets. On a month-on-month basis, headline inflation eased by 5bps to 1.77%.
Food inflation moderated for the second consecutive month to 1.98% m/m in August (vs July: 2.04% m/m) – the lowest in six months – despite the increase in the prices of Farm produce (+4bps to 1.91% m/m). The higher m/m increase in Farm produce prices reflects the fading impact of the green harvest in the country’s Southern parts amidst a prolonged lean season in the Northern region. While Farm produce prices notched higher in the review period, we highlight the Processed food (-10bps to 2.00% m/m) and Imported food (-1bp to 1.38% m/m) sub-baskets moderated, positively affecting the overall food basket. However, on a year-on-year basis, food prices rose by 110bps to 23.12% (July: 22.02% y/y) – the highest print since October 2005 (24.56% y/y). In our view, the higher y/y reading primarily reflects the impact of the low statistical base effect from the prior year amid the lingering existing challenges impeding food production and supply.
Similarly, the core inflation moderated by 17bps to 1.59% m/m (July: 1.75% m/m), mirroring the decline across its sub-baskets safe for Transport prices (+1bp to 1.64% m/m). However, on a year-on-year basis, the core inflation notched higher by 94bps to 17.20% – the highest print since January 2017 (17.87% y/y). The elevated core inflation reflects the increase in fuel prices and currency pressures compared to the prior year. Accordingly, price pressures remain entrenched across the Transport (+66bps to 18.24% y/y), Utilities (+64bps to 15.92% y/y), Clothing & footwear (+48bps to 18.21% y/y), and Education (+48bps to 16.49% y/y) sub-baskets.
On a balance of factors, we expect the pressure on consumer prices to be maintained, and we now see the headline CPI at 1.70% m/m in September, with the unfavourable base effect in the corresponding period of 2021 cascading to a 66bps increase in y/y inflation rate to 21.18%.
