Inflation went up in September

Assan KurmanbekovOctober 03, 2017

Price inflation in September rose by 0.3% mom, up to 7.1% yoy, and 4.2% ytd, the level of average annual inflation dropped to 8%. 

According to the Committee on Statistics, consumer price inflation in September rose by 0.3% mom, up to 7.1% yoy, and 4.2% ytd, the level of average annual inflation dropped to 8%. In our assessment, the seasonally-adjusted (hereinafter-SC) prices in September slowed to 0.3% mom, versus 0.4% mom in the previous month and 0.8% on average per month in the first half of 2017.

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Food prices are decreasing for the third month in a row -0.5% in September,-0.1% mom sa, +3.1% since the beginning of the year. The pace of price declines is fading in agricultural products: cereals -2.3% mom (-2.5% mom in August), fruit -1.2% mom (-2.9% mom in August), vegetables -9.1% mom (-13.8% mom in August). There has been an increase in the prices of confectionery +0.9% mom, +0.9 meat, mom, dairy products + 1.1% mom.

Non-food inflation in September accelerated to 1.3% mom and 0.7% mom sa, +5.5% ytd. Prices rose for: clothes +1% mom, shoes +1.2% mom, diesel +3.6% mom, petrol +2.9% mom, + 0.9% medications. 

In the services sector in September an increase was at 0.4% mom and 0.8% mom sa, +4.3% ytd. House maintenance costs increased by 0.6% mom, health services by 0.9% mom, recreation and culture by 1.1% mom, education by 2% mom, transport by 0.8% mom.

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The results from population surveys for August, published by the NBK indicate heightened inflationary expectations of the population. The percentage of respondents anticipating the acceleration of price growth in the next 12 months rose to 17.5% in August (10.3% in February 2017.), the highest since the beginning of last year, when there was a high growth in prices. However, the proportion of respondents either expecting continuous reduction or awaiting price declines decreased to 11.2% (maximum of this year, 15.5%, was observed in February 2017.). The percentage of respondents anticipating a dollar increase rose to 62.5% in August (34.3% in April 2017) and progressively increased the fourth month in a row.

Our opinion

A strong increase in food inflation, which was the driver of rising prices in the first half of this year, abruptly went into decline in July-September, influenced by lower prices for agricultural products: fruits, vegetables, whole grains. It is worth noting that in the current year, the seasonal decline in food prices stood at 2%, which is not a typical situation, the average seasonal decline equal to 0.5%, rarely 1%, also the conditions this year were less favorable - weaker harvest and weakening tenge. Prices for non-food goods and services since August began to move upward, especially for commodities, which are sensitive to the weakening of tenge, which for the last three months has devalued by 2% per month to the USD (6% over July-September, 2017.) Against the currency of a main trading partner, Russia, the share of imports from which comes close to 40%, tenge depreciated by 2% in August and by 5% in September. This has a direct impact on import prices and, in particular, motor fuel, in January-July gasoline imports amounted to 25% of the local market share, for diesel fuel the share is 6.5%. In autumn one and then the second refinery went for a regular maintenance , which has increased the share of imported fuel, fuel price hike in Russia, respectively, coupled with the weakening of the tenge, immediately affected the growth of prices.

In the fourth quarter of this year, in our opinion, food prices will accelerate significantly and compensate for the summer with an average growth rate of 1.3% per month in the fourth quarter. The pass-through effect of devaluation of tenge to US dollar and the ruble would support a rise in prices of goods at around  above 1% per month until the end of the year. Tariff changes will accelerate slightly in comparison with 0.5% on average per month for the past three quarters.

Recently, Minister of national economy T. Suleimenov, announced the Ministry's forecast for inflation this year at 6.9%-7.5%, in our view, this forecast is founded on curbing price rises using administrative measures and takes less into account the market factors, which influence the pricing.

In view of cost-push inflation, as factors of production prevail, especially influenced by commodity prices, and depressed consumer demand, we see the possibility for inflation to take hold at the level of 7.5% at the end of the current year, if the potential increase of tariffs (which were  commented by the President) will be postponed to the next year, and there will be no further devaluation of tenge relative to other currencies. At the same time, under the strengthening of inflationary expectations, inflation may reach the level of 8%, which corresponds to our basic forecast for this year. Thus, the range of price changes within our inflation forecast is 7.5% -8% in the current year.