Despite a sharp decline in July inflation due to base effects, the underlying monthly inflation trend has remained higher than theCBT’s projections, driven by administered price hikes and still- strong services inflation. We keep our forecast for end-2024 inflation forecast at 42.4%Y and continue to see rates unchanged in the remainder of the year.
Sharp decline in headline inflation on base effects: July CPI came in at 3.2%M, in line with our forecast and slightly above Bloomberg consensus (3.1%M). Base effects brought a sharp decline in headline inflation to 61.8%Y from 71.6%Y in June. Administered energy prices pushed monthly inflation higher: A 38% rise in electricity prices and backward-looking indexation in special consumption taxes (SCT) on fuel led energy prices to increase by 10%M in July. Despite its sharp rise, monthly energy inflation remained below last year (12.7%M), driving a decline in year-on-year energy inflation to 80.1%Y from 84.6%Y. A 38% hike in natural gas prices from August implies a 24.4% rise in average natural gas prices applied to households according to energy regulator (EPDK), which will add around 0.63pp to monthly inflation in August according to our calculation (excluding indirect effects).
Food inflation was moderate in July: Food inflation came in at 1.8%M, mainly driven by processed food (2.6%M), while unprocessed food remained relatively low (1.1%M) despite the MPC’s signal for upside risks related to unprocessed food prices in July. Base effects drove a sharp decline in food inflation in year-on-year terms to 58.9%Y from 68.1%Y.
Monthly inflation in services accelerated in July… Services inflation came in at 4.4%M (last 3M average: 3.9%M), driven by a sharp rise in monthly rent inflation to 7%M (last 3M average: 5.9%M). There was a broad-based acceleration in monthly inflation across all services subgroups including telecommunication (5.5%M), transport services (4.8%M) and restaurants and hotels (3.3%M). While base effects pushed year-on-year services inflation down to 85.6%Y from 95.3%Y in June, it remained well above core inflation.
…limiting the decline in core inflation: Core-C inflation came in at 2.5%M (last 3M average: 2.6%M). Year-on-year core inflation declined by 11.2pp compared to June, reaching 60.2%Y. This was largely driven by core goods, which is more sensitive to FX and domestic demand ( Exhibit 1 ). Monthly inflation in core goods came in at 0.4%M (last 3M average: 1.3%M), bringing a 12.4pp decline in year-on-year inflation to 38.3%Y. The details of core goods show that a rise in other core goods inflation (2.3%M) was offset by a decline in clothing prices (-2.7%M).
Limited rise in underlying monthly inflation trend in line with the MPC’s guidance: We estimate seasonally adjusted monthly inflation to have risen to 3.5%M for CPI (from the revised estimate of 2.4%M in June). This implies a limited For important disclosures, refer to the Disclosure Section, located at the end of this report.
rise in the last 3M average of seasonally adjusted CPI to 3.1%M (from 3%M in June) according to our calculations, in line with the MPC’s guidance from last month. But the monthly inflation trend remains above the CBT’s inflation projections, which see a decline in seasonally adjusted monthly inflation to an average of 2.5% in 3Q24, and to sub-1.5% in 4Q24, which underlies its 38%Y mid- point forecast for end-2024.
Tight monetary stance to continue: While today’s inflation print was broadly in line with expectations, and was largely driven by administered prices hikes, still-high and sticky services inflation and the relatively high levels of monthly inflation trend compared to the CBT’s projections should lead the CBT to continue a tight monetary stance and keep its tightening bias in communication, in our view. The
Inflation Report-III and the press conference on Thursday will likely underline the CBT’s commitment to disinflation, especially in view of next year’s target forecast path (14%Y mid-point). We do not expect an upward revision to the upper band of the forecast range for either this year (42%Y) or next (21%Y), but there might be a small upward revision in the mid-point forecasts for both years as the CBT might
prefer to reduce the width of the uncertainty band as the forecast horizon shortens.
We continue to expect unchanged rates in the remainder of the year: Relatively stable FX since end-March and the ongoing slowdown in domestic demand should support a decline in the underlying inflation trend beyond July and August. But risks related to relative price adjustments, backward-looking and time-dependent pricing behaviour in services subgroups, as well as elevated inflation expectations do not leave much room for easing, in our view. The increase in geopolitical risks and
volatility in global markets also support our view for rates to be held higher for longer. We keep our forecast for headline inflation to decline to 42.4%Y at end- 2024, which implies seasonally adjusted monthly inflation remaining above the
CBT’s projections for a 1.5%M SA average in 4Q24 . Given ongoing risks around the pace of disinflation, we continue to expect the first rate cut in February, after the resolution of uncertainty around publicly set wages and prices.