According to the Committee on Statistics, inflation in December 2019 was 0.7% mom, unchanged from November. Taking into account the seasonal adjustment (sa), inflation firmed slightly in comparison with the previous month and amounted to 0.4% mom by our estimates. In annual terms, inflation amounted to 5.4% compared to 5.3% in 2018 with a minimum reading of 4.8% in 2013.
In the group of food products, prices in December increased by 1.1% mom (+0.5% mom sa), providing 0.4pp in total inflation. Food prices — bakery products and cereals, meat, dairy products, eggs, and seasonal fruits and vegetables — continue to show high growth of prices. Price reductions were observed for rice, selected vegetables and sugar. Prices for non-food products increased by 0.6% mom (0.4% mom sa), providing a contribution to inflation of 0.18pp. The cost of clothes and shoes, household items, diesel fuel has increased. In the service sector, tariffs increased by 0.3% mom (+0.5% mom sa) with a 0.09 pp contribution to price changes. The main factors of increase: health care services, restaurants and hotels.
Our opinion
Stable inflation in 2019 at the level of 5.4% was largely achieved due to government intervention, which resulted in a reduction in tariffs for state monopolies in the utilities sector (-2.7%) and lower prices for fuel (gasoline -4.6%). As a result, for example, paid services increased by a modest 0.7% over the year, while in 2018 their growth was 4.5%. In fact, the difference between rising prices for services in these last two years can be considered as potential pressure on inflation, which was artificially removed from the consumer market. At the same time, costs were temporarily shifted from consumers to companies engaged in this sector. So, SamrukEnergo profit fell by 65% yoy for 9M2019, KEGOK - by 7% yoy.
Food prices rose sharply and approached 10% in 2019 (5.1% in 2018), but signs of a decrease in their pressure are already visible. The value of non-food products grew moderately throughout the year and ended the year at 5%.
In 2020, there is high uncertainty regarding inflation dynamics associated with the need to increase utilities tariffs to cover the costs of modernizing dilapidated fixed assets. In addition, according to the Ministry of Finance, an increase in the cost of gasoline by 7% is expected due to an increase in excise taxes.
We believe that the change in regulated tariffs will occur gradually to minimize the negative impact and maintain control of prices. Our inflation forecast for 2020 is 5.5%. At the same time, inflationary risks remain on the part of state budget expenditures, which, although they should decrease by about 1pp of GDP compared to 2019, will remain at a high level due to financing the growth of salaries for state employees and increasing pensions. Against the background of the expected slowdown in the global economy, the influence of external factors on inflation by our estimates will be moderate.
