February 2008 Inflation Outlook: To stay above 7 percent

14 02 2008

In January 2008, the consumer price index (CPI) rose 1.77% MoM (month-on-month), after increasing by 1.10% MoM in December 2007. As such, the YoY (year-on-year) inflation rate increased from 6.59% in December to 7.36% in January.

Prices rose in all components of the CPI. The biggest increase was posted by the Foodstuffs component (up 2.77% MoM), followed by the clothing component (up 2.31%), the processed foods component (up by 2.02% MoM), the housing component (up 1.80% MoM), the medical care component (up 0.72% MoM), the transportation component (up 0.24% MoM), and the education component (up 0.10% MoM).

The January inflation figure was considerably higher than expected (we had expected the January inflation figure to reach 1.06% MoM). Driving inflation higher were high prices of rice and kerosene. Note that flooding in some parts of the country has heightened concerns of poor harvests in the coming months. This created rumors of rice scarcity, which, in turn, led to sharply higher rice prices. Government intervention in the rice market had been expected to help stabilize the price of rice. But such efforts did not help as much as expected, however. As a result, rice prices rose significantly in January – in fact even more than in December. Making things worse, traders took advantage of the situation by raising the selling prices of other foodstuffs as well. And since higher foodstuff prices mean higher input costs for the prepared foods industry, the producers of prepared foods passed on the increases in production costs to consumers.

The significant rice price increases in December-January over the last two years might alter inflation expectations, and furthermore, might slightly alter the long-term inflation trend. As such, inflation might not fall below 6 percent in 2008.

Looking ahead, although the flooding in parts of the country shall put some additional upward pressures on prices, we still expect seasonality factors to help ease inflationary pressures in February. For a start, the harvesting season will start to kick in at the end of the month. In addition, the government announced its “price stabilization policy” in early February in a bid to bring down the prices of five main commodities (rice, cooking oil, soybeans, wheat, kerosene) to their normal levels. Hopefully, this policy shall help to minimize price fluctuations. As such, we expect monthly inflation to be lower in February than in January.

Against this backdrop, we predict that inflation will reach 0.61% MoM in February 2008, with the YoY inflation rate falling slightly to 7.35%. Download Full Report




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