PPS Investments: CPI for November 2021

Consumer price inflation increased by 5.5% year-on-year as at the end of November 2021, up from the 5.0% increase recorded in the previous month. This is highest year-on-year increase since March 2017 when inflation grew at 6.1%. After a pedestrian average increase of 3.3% for 2020, inflation is likely to average close to 4.5% for 2021. Month-on-month inflation rose by 0.5% compared to the modest 0.2% increase October.

It has now been three consecutive months that all 11 of the inflation categories increased over the 12-month period. The largest contributors to the increase were transport (2.1%), Housing and utilities (1.0%) and food and non-alcoholic beverages (1.0%). Sub-category analysis revealed that fuel (up 34.5%) and electricity (up 14.0%) continued to increase sharply over the past year with the second-round effects of these contributors likely to affect further price increases.

Inflation is well above the Reserve Bank governor’s 4.5% target, even though it remains within the target band. At the last MPC meeting short term interest rates were increased by 25 basis points and it appears likely that further rate hikes can be expected. The relatively poor GDP growth, that was recently released, may be a consideration for the MPC in the decision making though. Even with the recent uptick in inflation, PPSI remains constructive on both domestic nominal and inflation-linked bonds, as investors can benefit from the steepness of the yield curve and the high absolute yield levels on offer.