In brief
- Headline inflation came in close to our expectation with a 30bps uptick in the annual rate to 42.5% y/y in June 2023 (IC Insights: 42.7% | average market expectation: 40.8%). The month-on-month inflation softened to 3.2% in June 2023 (IC insights: 3.4%) compared to 4.8% m/m in May 2023.
- The stronger annual inflation was due to a second consecutive month of upsurge in food inflation, which accelerated by 240bps to 54.2% y/y, despite a 120bps decline in non-food inflation to 33.4% y/y.
- We disaggregated the headline inflation trend and found comfort in the soothing effect of a declining non-food inflation over the past 6-months. However, we observed that food inflation has started to diverge from the non-food inflation group. The consecutive rise in food inflation over the past 2-months resulted in increases in the annual headline inflation rate over the same period.
- As the harvest season looms in 3Q2023 amidst the diminishing impact of the new taxes, we expect improved agrarian supplies to soothe the pain points in food inflation in the months ahead. Our expected return to the path of disinflation in 3Q2023 hinges on less disruptive increases in global and domestic energy prices as well as less aggressive tax hikes during the upcoming mid-year budget review later in July 2023.
- For the July 2023 inflation outlook, we expect headline inflation to moderate both at the year-on-year and the month-on-month levels due to favourable trailing energy prices and moderating pace of increase in food inflation. Against this backdrop, we expect a decline in year-on-year inflation to 41.7% while the month-on-month inflation cools further to 2.5% in July 2023.
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