The 0.5 percent increase in inflation comes after three consecutive monthly increases above one percent, from March to June.
The rise in the July reading is attributable to the usual culprits: food and fuel prices, as demonstrated by general increases in food prices and the rise in fuel prices which came into effect on July 20.
The food index jumped two percent, contributing four percent to the CPI number while the transport index jumped 6.1 percent contributing an even higher number of 7.1 percent. Although inflation has been trending upward since October, it is interesting to note that the monthly rate of growth slowed down in July, suggesting that inflation may have lost steam.
While our best-case-scenario is for a relatively benign fuel and food contribution, it is too premature to call for a celebration.
For one, the petrol price provides for most of the variation in the transport index, and any increases in crude oil prices as a result of geopolitical tensions over Iran's nuclear programme or a weakening US dollar, just to mention a few factors, might take oil prices back to those high levels. This would put upward pressure on domestic fuel prices. Furthermore, we are still confronted by stubbornly high food prices, mostly in breads and cereals, as well as milk, cheese, and milk products. In analysing the food index data, there is nothing substantial to suggest that the food inflation tide is over. On the bright side, the recent lower crude oil prices do bode well for the inflation outlook.
Fuel prices have already been reduced by 50 thebe, taking our initial forecast for August inflation to 14.9 percent. Although we believe inflation reached its peak in July, the proposed 70 percent liquor levy will definitely weigh negatively on inflation. Alcoholic beverages make up 8.09 percent of the CPI basket.
A 70 percent increase in alcohol prices will add about six percent to the overall CPI number, and probably change BoB's view that the current level of interest rates is sufficient to restrain the second-round effects of past increases in fuel prices and other input costs.
As a result, given the volatility of crude oil prices, and the possibility of a 70 percent liquor levy, the upside risk to the inflation outlook remains negative.
*Maungo Lebanna, analyst at Investec Asset Management Botswana
