Another round of high inflation in October

Assan KurmanbekovNovember 02, 2017

The consumer price inflation in October sharply increased by 1.2% mom, up to 7.7% yoy, and 5.4% YTD

According to the Committee on Statistics, the consumer price inflation in October sharply increased by 1.2% mom, up to 7.7% yoy, and 5.4% YTD, the level of average annual inflation declined to 7.7%. In our assessment, the seasonally-adjusted (hereinafter-sa) prices in October increased by 0.5% mom, compared with 0.3% mom in the previous month and 0.8% on average per month in the first half of 2017.

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The food prices after declining for three consecutive months, rose by 1.3% mom 0.3% mom sa in October +4.5% YTD. A continued decline in agricultural commodity prices is observed: cereals -1.3% mom, flour -0.3% mom, sugar -4% mom and for selected vegetables. The rest of food items demonstrate a substantial increase in prices: confectionery +0.7% mom, dairy products +1.5% mom, meat +0.5% mom, fruit +0.9% mom. Anti-growth leaders became vegetables +8.5% mom, potatoes +20.7% mom, eggs +8.6% m/m.

The non-food inflation in October showed a growth of 1.9% mom and 0.7% mom sa, +7.5% since the beginning of the year. Prices rose for: clothing +0.9% mom, shoes +2% mom, diesel +5.8% mom, petrol
+7.9% mom, medications +0.4 mom.

In the service sector in October, the increase was 0.3% mom and 0.4% mom sa, +4.6% YTD. Housing services increased by0.9% mom, health services were up by 0.3% mom, recreation and culture by 0.4% mom.

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The results from population surveys for September, published by the NBRK indicate the heightened inflation expectations of the population. The percentage of respondents expecting accelerating price growth in the next 12 months had risen to 18.2% in October (lowest this year 10.3% in February 2017), the highest in two years. However, the proportion of respondents awaiting either continuous reduction or fixed prices decreased to 10.2% (maximum this year 15.5% in February 2017). The percentage of respondents expecting United States dollar price increase rose to 63.4 in October (lowest this year 34.3% in April 2017) and progressively increases for the fifth consecutive month.

Our opinion

As expected, after slowing food inflation in July-September, its growth rate has accelerated sharply over the past month, and most likely will more than offset its brief drop in the remaining two months of current year. Prices for non-food goods and services since August began to rise and, in particular, for non-food items, which are sensitive to the weakening of tenge. In September, the tenge passed 340 mark for USD, and in October reached 345 per dollar. This served as a driver of growth of prices of non-food items and especially automotive fuels, which in turn translates to all prices in the economy. The additional factor isan increased inflation expectations of the population. Thus a combination of factors: refinary repairs, the weakening of the tenge despite a rise in oil prices and growing fuel prices in Russia have resulted in a sharp increase in non-food products, while food prices have extremely volatile pattern from season to season due to its perishable nature.

Acceleration of inflation at the end of the year is seasonal and is traditionally formed at the expense of agricultural products, and seasonal growth in demand in the run-up to the New Year. Despite the sharp acceleration of inflation we don't expect a further strong acceleration (1-1, 5% per month) and adhere to 8% mark by the end of this year. The exchange rate of tenge to the USD in our view will stay in the current limits of 330-340 against the oil prices within the $50-$60 per barrel. Current fuel prices, in our view, already reflect to a large extent a realized growth potential. But its further rise is possible, if the decision is made on the alignment of excise size to the Russian level, but it could take place next year.

Previously, we had assumed that the level of the base rate in November might be reduced by 0.25pp to 10%. However, in view of the deteriorating situation with inflation, which, however, still is formed by non-monetary factors, cost push inflation, we believe, the NBRK could take pause for 1 quarter and wait for price and its expectations stabilization.