The average price level in the economy continued its acceleration in May 2022, with food prices being the catalyst. According to the data released by the National Bureau of Statistics, the Headline Inflation rose by 89 basis points to 17.71% year-on-year in May 2022 from 16.82% year-on-year in April 2022. It was the highest inflation rate since June 2021, nearly a year ago. On a month-on-month basis, the Headline Inflation rose to 1.78% in May 2022 from 1.76% in April 2022.
The inflationary pressures in May 2022 were driven by higher average food prices, resulting from the ongoing geopolitical tensions in the Eastern Europe. In our previous reports, we attributed higher food prices to legacy issues (i.e., lingering bottlenecks affecting local food production, some of which include inefficient logistics, poor farming techniques, poor transportation, and less-impactful investments in the agricultural sector). While these issues remained, we believe that the recent pressures on food prices were majorly due to higher costs of inputs used in food production.
We expect to see sustained inflationary pressures in the near term, for as long as prices in the global commodities market remain high. Although the monetary policy authorities could attempt to stabilise prices, we do not think they would be effective due to the nature of the underlying inflation drivers.
Expectations for higher inflation rate could likely result in repricing of yields in the fixed income markets. Already, yields have risen across the different segments of the fixed income from year-open levels, we expect yields to rise further. This is definitely negative for the equities market.
Please follow the link ” Geopolitical Tensions Cascade into Domestic Economy… Domestic Food Prices Under Pressure” to view the full report.
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