A welcome decline in m/m inflation

The latest inflation report from the NBS shows headline inflation y/y at 16.0% in August: the seventh successive slowdown. Our expectation shared with wire service polls of analysts was an uptick to 16.3% y/y. The rise in the core measure rose from 12.2% to 12.3%. Meanwhile, food price inflation was more or less unchanged at 20.3% y/y; the rounding off masks a decline of 3 bps.

Food price inflation has remained stubbornly above 20%. We blame logistical issues due to the relatively harsh weather conditions (seasonal rains). Additionally, the flooding crisis in specific northern states has resulted in lower agricultural output, in turn affecting food prices.

Imported food prices rose marginally to 14.4% y/y from 14.1% recorded in July. There has been improved fx liquidity since the introduction of the NAFEX window in April. NAFEX turnover amounted to US$3.7bn in August according to FMDQ.

The m/m increase in headline inflation slowed from 1.2% in July to 1.0%. This suggests a movement towards general price stability; the stable fx environment has been supportive. The trend is also consistent with the softening of household demand.

We doubt that the monetary policy committee will be quick to make any decision on the policy rate until a steady downward m/m trend is observed. An unchanged stance is more likely. The committee is scheduled to meet next on 25 and 26 September.

For September, we project headline inflation at 16.3% y/y.

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