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December 2022 Inflation review - Inflation cools for the first time in 11 months

Inflation cools for the first time in 11 months

After months of stubbornly high inflation, headline inflation moderated to 21.34% y/y (Nov’22: 21.47% y/y) in the last month of the year. The descent was as a result of high base effects from the previous year. On a month-on-month basis, however, headline inflation rose further to 1.71% m/m, 32bps higher than the previous month, due to strong festive demand and persisting fuel scarcity.

 

Festivities drive food inflation higher

Food prices rose at a faster rate of 1.89% m/m in December (Nov'22: 1.40% m/m) due to increased demand during the Christmas season. The highest pressures were observed on the prices of Oil and Fat, Fish, Potatoes & Tubers, Bread & Cereals, and Fruits. On an annualised basis, food inflation fell to 23.75% y/y (Nov'22: 24.13% y/y) due to lower farmgate and processed food prices.

 

Core inflation at 15-year high

Moving on to the core segment, core inflation increased to a 15-year high of 18.49% y/y (Nov'22: 18.24% y/y), primarily due to lingering energy pressures. On a month-on-month basis, however, the absence of new shocks and relatively stable exchange rate slowed the core index to 1.33% m/m (Nov'22: 1.67% m/m).

 

MPC to maintain hawkish tone

In January, the covert upward revision in electricity tariffs and fuel scarcity incidences could keep inflation elevated. Thus, we expect inflation to rise slightly to 21.38% y/y in the first month of the year.  While we do not doubt the possibility of a descent in January, persisting pressures could alter the pace of disinflation. Against this backdrop, we expect the Monetary Policy Committee to raise rates at a modest pace (50 - 100bps) in its first meeting of the year. Overall, we expect headline inflation to average 20.0% y/y in 2023 (2022: 18.76% y/y).