In its Art IV Consultations 2017 Press Release, the IMF
considers that inflationary pressures need to be tackled - “Inflation has picked up …., but there are signs of building of
inflationary pressures.”. Some of our local analysts disagree. Let us try
to grasp some of the portents of our inflation narrative.
The inflation narrative up to July 2017 shows that the surge in
inflation has been accentuated by the budgetary measures. Headline inflation
rate for the twelve months ending July 2017 was
2.7%, compared to 0.9% for the twelve months ending July 2016 and the
year-on-year inflation rate for July 2017, was 5.3%. But before the coming into
operation of these measures, “Headline inflation has gradually been increasing
from 0.8 per cent in September 2016 to 1.5 per cent in April 2017, reflecting
among others, the behaviour of volatile vegetable prices and the increase in
domestic petroleum prices in February 2017. Year-on-year inflation, reflecting
inherent dynamics, has been quite volatile and varied between 1.3 per cent and
2.9 per cent. “ But it is also true that the core inflation figures (CORE1 which excludes "Food, beverages
and tobacco" and CORE2 excludes Food, beverages and tobacco, ,
electricity, gas, other fuels) show a modest upward trend.
The Eurozone economy is also facing a
similar combination where core inflation lags behind as energy drive price
rises. Indeed, inflation in the Eurozone rose faster than expected in August,
but underlying measures that exclude volatile energy prices remained stagnant. Prices
rose 1.5 per cent year on year, up from 1.3 per cent in the year to July.
However, energy was by far the largest driver of the increase, with energy
prices rising 4 per cent year on year.
But the European Central Bank (ECB)
president Mario Draghi has repeatedly stressed the need to look beyond the
volatile energy prices and core inflation when deciding on the timing for a
change in monetary policy. That is, the other relevant indicators for the
Eurozone economy which are adding to the headaches facing the ECB on its
monetary policy stance are a healthy economic growth, falling unemployment and
the risks of an overshooting exchange rate.
Similarly, in our case, what is even more relevant to the
narrative are these observations from the BOM publication -“Monetary Policy and
Financial Stability Report-May 2017”-“Staff
assessment is that, for the year 2017, based on alternative projections, the
balance of risks to the inflation outlook appears somewhat tilted on the
upside. The probability that inflation will divert above the forecast in the
baseline scenario is estimated to be higher than the probability that it will
divert below this forecast.” Some of the elements of the alternative
projections are: the closing down of the output gap, a strengthening of
international commodity prices, the presence of excess liquidity reaching
Rs10.7billion by the end of April 2017, the pick-up in domestic credit to the
private sector and the cumulative impact of the increase in petroleum prices,
among others. Thus the headline and core inflation figures seem to be only part
of the inflation narrative.
