CPI inflation slowed further to 2.7% y/y in December, its lowest level since May 2018, the statistical institute (NSI) reported. The inflation easing was in particular driven by a 0.4% y/y drop in fuel prices during the month following the global moderation of oil prices in the past two months. We still expect CPI inflation to remain strong in the next months, on the back of rising food and utility prices. On monthly terms, CPI inflation was flat in December.
Food inflation accelerated to 2.6% y/y in December, up from 2.4% y/y in the previous month, as wheat and grain prices continued to surge due to the bad summer harvest. On the other hand, prices of other foods, including meat, fish, oils, sugar and fruits continued to fall y/y during the month. We think that further acceleration of food prices in the short run is very likely given the strong increases in wholesale electricity prices for the business over the past two months. Factors such as strong domestic consumption and rising food imports will continue to boost food price growth as well, in our opinion.
Non-food price inflation eased to 1.2% y/y in December, mostly due to the fuel price decline. A decline of clothing and footwear prices also contributed as well as the moderating price growth of household equipment and furnishing.
Services’ inflation picked up to 4.3% y/y and we expect it to speed up further as of Q1 due to the 9.8% increase in water prices on average as of Jan 1. The utility regulator did not raise district heating and electricity prices in Q1, but the already accumulated increases in gas, district heating and electricity prices over the past quarters, will continue to exert an upward effect on CPI inflation in the mid-run, in our view.