July 2021 Inflation - Base effects pull headline inflation below expectation
Base effects pull headline inflation below expectation
According to the National Bureau of Statistics (NBS), headline inflation fell to 17.38% y/y (Vetiva: 17.55%) in July. We attribute the deceleration in headline inflation to favourable base effects, the reopening of the borders, and stable PMS price through the retention of fuel subsidies. On a month-on-month basis, headline inflation rose at a slower pace - 0.93% m/m (June: 1.06% m/m) influenced by lesser pressures on the food segment - 0.86% m/m (June: 1.11% m/m). Meanwhile, core inflation rose at its fastest pace in 4 years on a month-on-month basis, up 1.31% m/m (June: 0.81% m/m), mirroring the adverse impact of the recent weakness in the parallel market.
In the current month, we see headline inflation slipping further to 16.96% y/y driven by sustained base effects, social resistance to energy reforms, and the harvest season. While we acknowledge nascent pressures from the discontinuation of FX sales to BDCs and the passage of the Petroleum Industry Bill, food inflation remains the dominant driver of current inflationary pressures. Thus, we expect headline inflation to average 16.30% y/y in 2021 (2020: 13.25%).
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