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February 2021 Inflation Note - Stagflation Holds Sway

The National Bureau of Statistics released the latest readings for both inflation and unemployment. With headline inflation growing 86bps higher to 17.33% y/y (Vetiva: 17.12% y/y), consumer wallets are still reeling from pandemic-induced disruptions, currency adjustments and higher gasoline prices.

Food inflation rises to all-time high Food inflation sustained its 18-month run to 21.79% y/y (Vetiva: 21.77% y/y), which represents its highest reading since the current CPI series began in 2009. The food basket has faced numerous supply-side shocks from supply chain disruptions, elevated transport costs, poor storage facilities, adverse weather conditions and conflict in food producing areas. On a m/m basis, food inflation rose higher to 1.54% m/m (Jan’21: 1.49% m/m) as the impact of border-reopening was muted.

Double shocks to elevate prices further. In the month of March, consumer prices faced two short-lived shocks – fuel price hike and food blockade - which were quelled after prompt intervention by the authorities. We expect these events to trickle into the headline inflation numbers for the month of March. Despite the ruling out of pump price increases, inflationary pressures from fuel scarcity, panic buying, and other pre-existing pressure points could drive headline inflation to a new 4-year high of 18.01% y/y in the ongoing month, while core inflation is expected to maintain a further uptrend to 12.7% y/y. Despite the absence of requisite adjustment to pump prices, fuel prices are still higher on a y/y basis.