Inflation in 2017 came closer to the long-run average

Assan KurmanbekovJanuary 03, 2018

The consumer price inflation in December continued deceleration for the second month in a row to 0.7% mom and 7.1% yoy, the level of average annual inflation marginally fell to 7.4%. 

According to the Committee on statistics, the consumer price inflation in December continued deceleration for the second month in a row to 0.7% mom and 7.1% yoy, the level of average annual inflation marginally fell to 7.4%. In our assessment, the seasonally-adjusted (hereinafter-sa) prices in December increased by 0.1% mom, compared with a 0.5% mom in the previous month.

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Food prices in December rose by 1.1% mom, 0.1% mom sa, +6.5% since the beginning of the year. Prices for cereals declined by 0.8% mom, sunflower oil - by 0.4% mom, sugar – by 2.2% mom and certain vegetables. For the rest of the food products there was moderate price increases: eggs +3.2% mom, dairy products +0.7% mom, meat +0.8 mom, fruits and vegetables +4.5% mom, confectionery +1.1% mom.

Non-food inflation in December showed growth at a 0.5% mom and 0.0% mom sa, +8.9% since the beginning of the year. Rose prices for: clothing +0.7% mom, shoes +0.7% mom, diesel +0.5% mom medicine +0.7% mom. 

In the services sector in December, the increase was 0.3% mom and 0.3% mom sa, +5.9% since the beginning of the year. Increased housing services +0.3% mom, central heating +0.2% mom, gas +0.7% mom, health services +0.5% mom, transport +1.3% mom.

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The results from population surveys for November, published by the NBRK may imply the increased inflationary expectations of the population. The percentage of respondents expecting acceleration in price growth in the next 12 months rose to 21.3% in November (minimum this year, 10.3% in February 2017), the highest since January 2016, when there was a high inflation. However, the proportion of respondents awaiting either continuous reduction or no change decreased to 6.7% (maximum this year 15.5% in February 2017). The percentage of respondents, expecting United States dollar appreciation rose to 59.8%, slightly lower than the peaks in August and September (minimum this year, 34.3% in April 2017).

Our opinion

Annual growth of prices for the period from 2008 speak about the pace of price changes approaching the long-term norm in 2017, after their surge, caused by the devaluation of the tenge at the end of 2015.

The exchange rate of tenge to US dollar rose by 5% to 326 (average per year) in 2017 despite weakening to 345 this fall, but favorable change of prices in the oil market has allowed the tenge to strengthen by the end of 2017.

The slowing of inflation at the end of 2017 looks quite unexpected given the continued rise in the prices of motor fuel and persistent inflationary expectations. At the end of last year, there was a marked slowdown in the pace of economic growth and in retail trade turnover, which could partially affect the slowing price growth. However, the dramatic fall of price growth raises some doubts about the reliability of data on inflation, especially in the midst of an increase in retail sales on the New Year’s eve, the high level of inflation expectations of the population.

In 2018, in our view, inflation will continue its slowdown to a 6.5%, which would be facilitated by the likely strengthening of tenge at the beginning of the year, the stabilization of fuel prices due to the increase of oil refining at the modernized refineries.

The weak demand, driven by declining real incomes, would serve as a constraining factor to rising prices. The planned reduction of the infusion of funds from the National Fund to the budget and overall reduction in budgetary expenditure relative to GDP also will have an effect on the inflationary pressure reduction.

At the same time, in view of the close trade links in the region and a market mechanism of equal prices, rising fuel prices in Russia could trigger a certain increase in their prices at the local market. In addition, highly likely the raise of tariffs of State monopolies, which is obviously was constrained in recent years.  

The entrance of inflation in new corridor 5-7% in the New Year and the deceleration of economic activity gives reason to expect further easing of monetary policy.