Drop in petrol prices outweighs uptick in airfares

The Transport division of the CPI has been in the cross-hairs recently, owing to the surge in oil prices due to the conflict in the Persian Gulf. In May, the Transport division fell by 0.8% (-0.13% CPI effect), mainly because petrol prices (a subcomponent of fuels and lubricants for personal transport equipment) declined by 7% (-0.21%).

This was offset in part by airfares, which rose 2.9% (0.08%) but nonetheless fell short of our forecast. The drop in petrol prices is in line with our forecast, however, and can be attributed to the temporary reduction in value-added tax (VAT) on fuel. The decline would most likely have been larger, however, if global crude oil and processed fuel prices had not risen over the same period.

The main driver of this month’s rise in the CPI was housing. The CPI division as a whole increased by 0.55% (0.16%), owing mainly to imputed rent, which rose by 0.65% (0.13%). Imputed rent has now risen for two months in a row. It appears to be moving broadly in line with the rent price index, which has eased upwards recently.

Food and furniture prices down

The biggest surprise in SI’s measurement was a marginal decline in food prices, which tapered by 0.04% (-0.01%). This is a positive sign, especially because food prices held steady in April. It therefore appears to us that higher prices of inputs needed for food production abroad have not yet begun to affect the domestic price level. There was also a decline in another CPI division that is sensitive to price movements abroad – furnishings, household equipment, and routine household maintenance – which fell by 1.4% (-0.06%).

The inflation outlook further ahead

• June: CPI to rise 0.6% (twelve-month inflation 4.8%) – Fuel prices rise, but less strongly than they did earlier in the spring. Airfares and restaurant/accommodation prices rise due to seasonal fluctuations.
• July: CPI to rise 0.2% (twelve-month inflation 4.7%) – Airfares increase for the peak season, while summer sales dampen price hikes for other items.
• August: CPI to rise 0.05% (twelve-month inflation 4.9% – End-of-sale effects counteract lower airfares.

If our preliminary forecast materialises, headline inflation will measure 4.9% in August, slightly above the aforementioned wage contract review threshold.

Underlying inflation according to core indices rose marginally in May, suggesting that underlying inflationary pressures are gathering a bit of steam. We expect stronger imported inflationary pressures in the months ahead, in view of the geopolitical situation. If imported inflation proves lower than we have projected, the August measurement could be below the review threshold. The size and duration of the increase will depend for the most part on how the conflict in the Persian Gulf war evolves, but it is clear that the effects will mount in the near future.