In brief
- Headline inflation surprised to the upside with a 100bps uptick to 42.2% year-on-year in May 2023, against the average market expectation of 37.0% (IC Insights: 40.1%).
- The rise in headline inflation was driven by a 310bps surge in food inflation to 51.8% y/y, accounting for more than half of the headline rate in the month under review. Non-food inflation however inched down by 80bps to 34.6% y/y.
- While the 100bps increase in headline inflation was unexpected, we were not shocked by the outturn as our April 2023 inflation update – Cut the Mustard – already flagged the elevated near-term risk. Specifically, we flagged the price effects of the new taxes and the unfavourable seasonality in agrarian output at this time of the year as upside risk which we expected to slow the disinflation rather than reverse the downturn.
- We took a closer look at the non-food inflation dynamics and observed that the 80bps decline in the non-food inflation rate may have concealed the rise in inflation for some services. Discounting the downshift in inflation rate for utilities, housing, gas & other fuels suggests that core inflation, which reflects underlying price pressures, probably went up in line with headline inflation for May 2023.
- With lagged impact of the higher taxes, recent hike in utility tariffs, and the elevated services and food price pressures, we do not rule out a marginal uptick in headline inflation in June 2023. However, we remain confident that the softening demand conditions and the relatively stable GHS around the high 11.0/USD amidst the downward pressure on global oil prices will cap the domestic price pressures.
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