Highlights

Headline Inflation rose to an unprecedented level in July 2022, with the reading printing at 19.64% YoY in July 2022 from 18.60% YoY in June 2022. The Headline Inflation recorded in July 2022 represented the highest since September 2005 according to data. On a month-on-month basis, the Headline Inflation was flat at 1.82% in July 2022 (June 2022: 1.82%).

Food Inflation rose to 22.02% YoY in July 2022 from 20.60% in June 2022. On a month-on-month basis,  Food Inflation marginally declined to 2.04% in July 2022 from 2.05% in June 2022.

Core Inflation, on the other hand, rose both on a year-on-year and month-on-month basis. On a year-on-year basis, Core Inflation advanced to 16.26% YoY in July 2022 from 15.75% in June 2022. On a month-on-month basis, it advanced to 1.75% in July 2022 from 1.56% in June 2022.

Analysis

Sustained pressures from energy prices and the pass-through effect on transportation prices were the two major pain points in July 2022. As stated in our previous reports, these pressures stemmed from higher prices in the global energy market primarily driven by the Russia-Ukraine geopolitical conflict.

In addition to the domestic energy prices, higher food prices driven by price increases in the global commodity market added to the pain points in July 2022. We attribute the bottlenecks affecting food prices to higher fertiliser prices, logistics costs, and storage. We also note the plausible impact of foreign exchange illiquidity.

Outlook

Our expectations for domestic prices in the near term are on the high side and uncertain to estimate. In our view, we do not see the inflation drivers (pass-through effect of the Russia-Ukraine conflict and FX illiquidity) abating in the near term. The market saw the Monetary Policy Committee (MPC) hike the policy rate two consecutive times – first by 150 basis points to 13.00% in May 2022, and by another 100 basis points to 14.00% in July 2022. In view of the persistent inflationary pressure, we expect the monetary policy authorities to adopt a more aggressive stance to tame inflationary pressures.

Please follow the link “Higher Energy and Transport Prices Stoke Inflationary Pressures” to view the full report.