CPI Preview: January inflation to soften to 27.2% YoY as base effect kicks in

January 27, 2024 (MLN): January will mark the beginning of a sharp trend in disinflation, with the headline inflation expected to soften to 27.2% YoY due to the favorable base effect.

However, the decline in yearly numbers compared to 29.7% last month is mostly driven by a significantly higher base last year, as monthly pressure on consumer prices is expected to remain elevated.

The monthly inflation is expected to rise 0.93% MoM as compared to the last 12-month average of 2.2% MoM.

Accordingly, this will take the average yearly inflation of 7MFY24 to 28.57% YoY compared to 25.40% YoY in 7MFY23.

Monthly inflation is expected to remain elevated primarily due to a rise in the food and housing index. 

Food inflation is anticipated to record a notable increase of 1.76% MoM, primarily driven by the inflated prices of Onions, Chicken, Tomatoes, Eggs, and Pulses.

Moreover, the housing index is projected to experience around a 1.54% MoM increase, primarily attributed to the quarterly rent adjustment.

Conversely, the transport index is projected to experience around a 2.69% MoM decrease, attributed to the relief in fuel prices.

Inflation Sensitivity

With a 0.5% month-over-month (MoM) inflation rate, the annual headline inflation will stand around 22% by February and fall below 16% by June 2024.

In contrast, even a 1% MoM inflation rate, which is also significantly lower than the 12-month average of 2.2% MoM, will keep real interest rates from turning positive until March 2024.

The following chart maps out the yearly inflation trajectory based on monthly inflation rates of 0.5%, 1%, 1.5%, and the 12-month average of 2.2%

Outlook

Beginning January, inflation is anticipated to start declining at a comparatively faster pace on the back of favorable base effect, lagged impact of monetary tightening, and other administrative measures.

However, unforeseen climate events, volatility in global commodity prices, especially oil, and external account pressures are some important upside risks to the inflation outlook.

Global oil prices are starting to climb back up amid geopolitical tensions, which can pose a threat to the inflation outlook.

Furthermore, another gas price adjustment, as asked by the International Monetary Fund (IMF), will add pressure to consumer prices.

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