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June Inflation Review - Slight dip to 16.1% comes in line with Vetiva expectation

Slight dip to 16.1% comes in line with Vetiva expectation
Headline inflation continued its descent in 2017 – June inflation printing at 16.1% year-on-year (y/y) vs. 16.3% in May – supported by an even stronger base from June 2016 (16.5% y/y). Despite this moderation in annual inflation, the month-on-month (m/m) trend shows persistent inflationary pressures in the economy, as June m/m inflation registered at 1.6% (May: 1.9%).

Core Inflation fell for the seventh consecutive month from 13.0% y/y to 12.5% y/y but rose on a m/m basis – 1.2% to 1.3%. In fact, stripping out volatile energy prices from the Core Sub-Index, m/m inflation (1.5%) was the highest since June 2016 (1.6%). Food Inflation charted a slightly different path as it rose in y/y terms (19.3% to 19.9% in June) but fell in m/m terms (2.5% to 2.0% in June). We note that Food Inflation remains stubbornly high in 2017, as on average, food prices have risen 2% in each of the first 6 months of the year, compared to 1.1% for non-food items.

Despite the moderation in diesel prices and relative stability in the FX market, food prices remain under pressure. Meanwhile, another monthly rise in Core Inflation suggests latent inflationary forces in the economy. Therefore, we retain our bearish outlook on inflation in the short-term, slightly adjusting our July estimate to 16.1% (previous: 16.0%) to account for sticky non-food prices. Considering the current and expected inflation path, we do not foresee a serious case for monetary easing at next week’s Monetary Policy Committee meeting.