Headline Inflation Sustains Steady Decline on High Base Effect

The Consumer Price Index (CPI) data for Jan-2018 was published earlier this week by the National Bureau of Statistics and in line with expectation, Headline Inflation moderated for the 12th consecutive month to print at a 21-month low of 15.1% Y-o-Y from 15.4% Y-o-Y in Dec-2017. The 24bps decline in Y-o-Y inflation was however majorly driven by high base effect as M-o-M Headline Index price growth accelerated 21bps M-o-M to 0.8% from 0.6% in Dec-17 against the backdrop of increases in Food and Core Indices M-o-M growths. The increase in M-o-M Food Inflation reflects seasonal rise in food prices associated with the end of main season harvest (particularly in the Southern part of the country) whilst Core Inflation pressures were driven by noticeable spikes in Utilities segment (Housing Water, Electricity. Gas and Other Fuel).

Y-o-Y Food Inflation Declines to 10-Month Low against Flattish Core Inflation
Core Inflation which tracks movements in prices of all items less farm produce stayed flat Y-o-Y in January at 12.1% due to pressures on energy prices which drove the Index M-o-M growth to 0.7%, 17bps higher than 0.5% in December. The highest increases in the month were recorded in fuel and lubricants for personal transport equipment, vehicle parts, accommodation and products for personal care, hotels and restaurants. As main season harvest gradually comes to a close, and with the beginning of planting season, Food Inflation (farm produce and processed food) measured M-o-M rose 29bps to 0.9% in January; yet, the Index Y-o-Y measure declined 50bps to 18.9% mainly due to high base effect. The highest increases were recorded in Bread & Cereal, Vegetables, Meat, Potatoes, Yams & Other tubers.

Inflation to Maintain Downward Trend Despite Food Seasonality Factor and Energy Price Instability
Our near-term inflation outlook remains benign despite the end of favorable food harvest season – with anticipated negative feedback on food prices going forward – as well as supply-side constraint in fuel distribution. As shown in latest CPI reports, the impact of rising fuel prices is still isolated within Utilities division while robust FX liquidity environment will, to a large extent, be favorable for other Core items. Furthermore, we expect M-o-M Food price growth in 2018 planting season to be below 2017 level due to reported above-average harvests in most areas; however, increasing pastoralists-farmers conflict in the agricultural belt and dry season demand for locally produced grains from neighboring countries are downside risks to watch out for. On a balance of factors, we expect Headline Inflation to further moderate to 14.8% in February and retain our year-end target of 12.3%. In the short term, we expect the positive price-level development in January to have a muted impact in the fixed income market as tightening global liquidity will likely offset near term downward pressure on inflation anchoring yield expectation lower.