CPI inflation accelerated visibly to 1.8% y/y in December, compared to 1.1% y/y for the previous month, the statistical office (KSH) reported. Average annual inflation came at 0.4% y/y and fully matched the central bank’s forecast from its Q4 Inflation Report from December. We believe that inflation being in line with the central bank expectations should mean that the noticeable pick-up in inflation in December should not prompt a change in the monetary policy outlook for further easing. Moreover, seasonally-adjusted core inflation remained quite stable at 1.4% y/y during the month and has exhibited only a very gradual upward trend in the past months.
The pick-up in consumer inflation in December was mostly due to foods and fuel price hikes. There were limited changes in the dynamics of clothing and consumer durable goods prices during the month, in our opinion showing that demand was still not a significant pro-inflation factor despite the strong wage increases and the recovery in household consumption. Regulated utility prices also remained unchanged y/y in December. Food prices strengthened to a 1.3% y/y growth for the month due to processed foods like milk products and unprocessed foods like fruits and vegetables. Prices of other unclassified goods also picked up, which was mostly due to fuel prices. Motor fuel prices were up by 6.8% y/y against the 0.6% y/y increase in the previous months and we expect further strong contribution to the CPI because of the base effect from the low global oil prices last year.
Services inflation also accelerated, extending an upward trend from the past four months. The upward trend seemed mainly due to rising prices for healthcare, in our opinion related to the government’s efforts to restructure the system, improve the quality of services and retain qualified personnel. Communication and entertainment services have also trended north in the past few months, which we think could reflect to some extent the increased household propensity to spend.