Headline inflation slowed down to 2.1% y/y in May, compared to 2.2% y/y in the previous month, the statistical office (KSH) reported. The slowdown had been rather expected as the central bank had forecast it, pointing to base effects from global oil prices. On the other hand, core inflation accelerated to 2.1% y/y in May and maintained a gradual but steady upward trend since Oct 2016. We think that this trend did not seem to be much related to strengthening demand-pull pressure on prices though so we do not expect the pick-up in core inflation to change the central bank’s monetary policy stance.
The slowdown in headline inflation in May was mainly on account of fuel prices. Fuel price growth moderated significantly to 4.7% y/y during the month, following similar trends of global oil prices. Other supply-sensitive prices, like food prices, strengthened further. Food inflation has been on a general upward trend recently, which we think was partly because of low base in milk products as well as unfavorable weather conditions. In May in particular, y/y price growth picked up in both processed and unprocessed foods, including dairy products, pork meat and fruits. Market reports and farmer price dynamics make us expect the trend to continue in the next months as well, especially given the likelihood for a lower harvest this year in Q3.
The inflation figures did not show much signs for increasing demand pressure on prices. Prices of clothing and consumer durable goods remained subdued and services inflation was stable as well. Services inflation slowed down to 1.5% y/y in May, which seemed to mainly reflect weaker transport services prices because of the volatile air fares. Increased demand probably showed up in rising growth of recreation services prices, in our view, but we think the general picture did not give an outlook for accumulating upward potential in prices.