Inflation stabilized at a low level in July and August

Assan KurmanbekovSeptember 05, 2017

The inflation in August had not changed on a monthly basis 0.1% mom, and fell to 7% yoy, and 3.9% YTD, the level of average annual inflation fell to 8.8%. Strong increase in food inflation which was driver of rising prices in the first half of the year has sharply gone down in July-August, influenced by lower prices for agricultural products: fruits, vegetables, cereals. While prices of non-food goods and services remained modest in January-July. 

According to the Committee on Statistics, consumer price inflation in August had not changed on a monthly basis 0.1% mom, and fell to 7% yoy, and 3.9% YTD, the level of average annual inflation fell to 8.8%. In our assessment, the seasonally-adjusted (hereinafter-sa) prices in August slowed to 0.5% mom, compared with 0.6% mom in the previous month and 0.9% on average in the first half of 2017.

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Food prices are falling for the second month in a row -0.5% mom in July and -0.9% mom in August, +0.5% mom sa, +3.6% since the beginning of the year. There has been an increase in prices for confectionery (+2% mom), meat (+1.1 mom), dairy products (+1.2% mom). Decline in prices was registered for fruit and vegetables (-9.2% mom), eggs (-1.5% mom), cereals (-1.5% mom).

Non-food inflation in August was 0.7% mom and 0.6% mom sa, +4.2% since the beginning of the year. Prices rose for: clothes (+1% mom), shoes (+0.8% mom), diesel (+1.8% mom), gasoline (+0.6% mom), household goods (+0.7% mom). 

In the services sector in August the increase was 0.7% mom and 0.8% mom sa, +4% since the beginning of the year. An increase was observed in house maintenance services (+2.7% mom), health care (+0.5%) mom, recreation and culture (+0.7% mom), transport (+3.4% mom).

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The results from population surveys for July published by the NBK indicated continuing inflationary expectations of the population. 38.9% of respondents felt that the current pace of a rise in prices will be maintained in the next 12 months. The percentage of respondents expecting accelerating price growth in the next 12 months increased to 16.1% in July, which is slightly higher than at the end of last year, when there has been an acceleration of price growth. However, the proportion of respondents expecting either continuous reduction or unchanged inflation increased to 13.4%. The percentage of respondents awaiting the dollar appreciation grew up to half in July and progressively increased for the third month in a row.

Our opinion

Strong increase in food inflation which was driver of rising prices in the first half of the year has sharply gone down in July-August, influenced by lower prices for agricultural products: fruits, vegetables, cereals. While prices of non-food goods and services remained modest in January-July. In August their acceleration can be associated with the depreciation of tenge by around 4% in July and August, that has a direct impact on import prices and, in particular, motor fuel, about one third of the needs of the local market, is imported from Russia. In connection with the beginning of harvesting period, the cost of diesel fuel began to rise again.

Since mid-August, the exchange rate of the tenge against the Russian ruble went beyond the range of 5.5 per ruble, the level maintained since the beginning of this year and steadily weakened to 5.9 per ruble on September 5. It remains unclear whether the NBK is pursuing the goal to affect the increasing dependence on imports from Russia, which share in the first half of 2017 rose to 38.5% versus 34.4% in the first half of 2016. It is noteworthy that this is happening against the backdrop of some strengthening of the ruble to the dollar, as the cost of oil remaines at a level above $50 per barrel. In addition, other currencies of commodity economies also demonstrate the strengthening against the dollar. Obviously, this will have and already had an impact on inflation due to high import dependence of the Republic.

Also recently, the President N. Nazarbayev, spoke in favour of addressing the issue of raising the tariffs of public services companies due to their need to finance the modernization. As we noted, there is a possibility of an increase in tariffs of natural monopolies, in this regard, we expected the consumer inflation to be at the level of 8%.

We continue to stick to this projection, while seeing the possibility for inflation to take hold at the level of 7.5% at the end of the current year, if potential tariff increase will be postponed until next year, and further weakening of tenge relative to other currencies will not materialize.