July 2020 CPI Report: Headline Inflation at 28-month High of 12.8%

There was sustained pressure on consumer prices as inflation rose to 12.8% y/y in July 2020 from 12.6% y/y in June based on the Consumer Price Index (CPI) report published this week. This is the highest level of headline inflation since March 2018 while the streak of increasing inflation has been sustained since the land borders were shut around September 2019. The noticeable increase in headline inflation was driven by higher MoM inflation at 1.3%, the highest since June 2017.

The trend in m/m inflation suggests underlying pressure on consumer prices, which is driven by food. In this regard, food inflation rose to 15.5% in July 2020 – the highest since March 2018. Recent food price pressure has been strong, with the food index rising 1.5% MoM, the highest since June 2018. Imported food inflation also recorded a marginal rise to 16.5% in July 2020 from 16.4% in the previous month as the index’s MoM inflation rose to a 33-month high of 1.3%. On the contrary, there was a 3bps moderation in core inflation to 10.1% in July 2020 as the MoM increase in the core index slowed to 0.8% from 0.9%.
We believe the consumer price pressures can be attributed to disruptions in the agriculture value chain, persistent insecurity as well as FX illiquidity and exchange rate devaluation. Going forward, we anticipate increased pressure on domestic consumer prices, to be driven mainly by food. Although the harvest season would begin in August, we are not optimistic of buoyant harvests due to disruptions to planting, weather challenges and insecurity. Beyond food, with petrol subsidies already phased out, higher oil prices and a weaker exchange rate are downside risks to inflation.