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May Inflation Review - Inflation dips on base effects as food prices continue surge

Ahead of both Vetiva (15.8%) and Consensus (16.0%) expectations, May 2017 inflation came in at 16.3% year-on-year (April: 17.2%) as persistent rise in food prices weakened the high base effect of May 2016 (15.6% y/y). On a month-on-month (m/m) basis, the Consumer Price Index (CPI) rose by 1.88% (April: 1.60%), the highest increase since May last year (2.75%) when we saw the upward adjustment in the regulated pump price of petrol. Across the major sub-indices, Core Inflation decreased from 14.8% y/y in April to 13.0% y/y in May, despite a marginal increase m/m from 1.10% to 1.17% in May. Food prices, however, rose 2.54% m/m – also the highest for a year – keeping y/y Food inflation sticky at 19.3% (April: 19.3%).

Inflation has consistently lagged expectations from the start of 2017. Rising base effects have moderated headline inflation but the drop has been less steep than expected on the back of a surprising consistent surge in food prices. This is despite reduced currency impact and energy price stability easing pressure on Core Inflation. The supply-driven rise in food prices shows no sign of abating (May m/m food inflation the highest this year) and compels us to adopt a more bearish stance on inflation trend for the rest of the year. So, whilst we expect base effects to consistently drag down headline inflation, we expect this to happen at a relatively slow pace and project 16.1% inflation in June (previous: 15.2%), bringing 2017 average inflation to 16.5% (2016: 15.6%).