Earlier, the National Bureau of Statistics (NBS) released the inflation figures for Oct-2020. Notably, the headline inflation rate rose from 13.71 y/y in Sept-2020 to 14.23% y/y – faster than our estimate of 13.97% and the highest since March-2018. This was driven by a 1.54% jump in the month-on-month (m/m) changes in general prices (vs. 1.48% m/m in Sept-2020).
Notably, price increases were observed across all components of the index with the cost of food being the major driver amid domestic supply shortages
On a segmented basis, the food inflation sub-index rose from 16.66% y/y in Sept-2020 to 17.38% y/y in Oct-2020. Food prices increased 1.96% m/m (vs. 1.88% in September). In our view, the pressure from the sustained shortfall in domestic food supply relative to the demand, continued closure of land borders and increased input cost fueled the increases in food prices during the period.
Elsewhere, the core inflation sub-index inched up to 11.14% y/y (vs. 10.58% y/y in Sep-2020), also m/m pressure increased to 1.25% (vs. 0.94% in Aug-2020). Notably, across the components of the core inflation sub-index, the highest increases were recorded in prices of Health and Transport services.
Looking ahead, we maintain our outlook for the headline inflation rate remains biased to the upside for the rest of the year, considering the expected rise in food inflation and the recent spike in the PMS pump price by the Petroleum regulators in the downstream sector.
Notably, pressures on the food inflation sub-index are likely to continue till the end of the year due to supply shortages, structural bottlenecks, logistical constraints, and currency supply shortages on the I&E window.
Furthermore, the expectation that high levels of system liquidity in the latter part of Q4-2020 without a commensurate increase in economic output will exert upward pressures on the core index.
Also, some demand pressures on passenger air travels and an uptick in hospitality and medical services key driver of higher prices. Overall, we project m/m inflation rate for Nov 2020 to come in at 1.5%, largely driven by the upward review of PMS pump prices and the resumption of suspended electricity tariffs from Oct-2020.