Food Prices to Moderate Downward Inflation Trajectory


Tuesday, March 13, 2018 /02:01 PM/ Meristem Research 

Inflation rate eased to 15.37% YoY in January 2018, 0.24% higher than our forecast of 14.89%. The higher than expected rate was driven largely by the increase in the cost of food items, which shot up by 0.87% Month-on-Month. Our forecast for February is 14.71%, which implies a 2.80pts increase in the Consumer Price Index to 251.2pts. We also expect the previous year’s base effect to contribute to the expected decline in inflation rate for the month of February.

Food Prices Remain Elevated
The less than expected decline in inflation rate in January was due to the upward pressure from the cost of food items, as food inflation rose by 0.87% to a twelve-month average of 19.62%, the highest since 2009. We expect this trend to be sustained in February, particularly as a result of further depletion to the stock of food commodities from the previous harvest season. We have also noted price increases across some major food items during our food survey in the month. This should temper the decline in the inflation rate over the period. 

Expected Moderation in Core Index
Although core inflation was flat at 12.09% YoY in January, it masked a 0.68% month-month growth (vs. 0.59% in December 2017). However, the twelve-month average of 13.01% is the lowest since March 2016, reflecting the relative stability in the exchange rate. We expect core inflation to ease further in February, given improvement in FX liquidity; external reserves grew by 4.44% month-on-month, from USD40.69bn to USD42.49bn. However, the celebration of the love season during the month is expected to put upward pressure on the cost of some components of the Core Index like the Recreation & Culture and Restaurants & Hotels sub-indices  

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Chart 1 shows the inflation rate and our forecast for February 2018. The chart is based on autoregressive analysis of monthly Consumer Price Index data, which was obtained from the National Bureau of Statistics (NBS). The chart indicates that the CPI will fall within 249.13pts and 257.71pts (the darkest green band) at 90% confidence level. Also, there is a 60% chance that the CPI will lie between 250.92pts and 255.09pts and a 30% chance that CPI in January will be between 251.94pts and 253.81pts.

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