Serbia Watch: Food and energy prices pushed inflation to 6.6% yoy in October

Inflation grew by 0.9% mom after 0.8% in September supported by clothing (+1.6% mom) and transport prices (+1.8% mom), whereas the food and non-alcoholic beverages prices calmed down the pace (+1.3% mom) after 2.3% mom in September. The main culprit behind the dynamism on the annualized level (+6.6% yoy) came from food and non-alcoholic beverages prices (+9.8% yoy) whose contribution to the CPI basket is high (31.4%). Further, housing, water, electricity, gas and other fuels showed an important uptick (+6.5% yoy) largely due to energy price growth and, finally, transport prices (+11.7% yoy). Thus, inflation has been pressed by 1.) local factors, i.e. the drought causing lower yield in vegetables and fruits, declining cattle fodder, causing meat prices growth and a combination of drought and price growth for sunflower products on the global markets coupled with the increased demand causing jump in edible oil prices and 2.) external factors, i.e. energy prices growth on the global markets.

We think, food prices will remain the main drawback for inflation, at least over the one-year horizon, supported by lowered commodity reserves caused by the drought and external factors (continued growth in the food prices on the global markets, reduced supply of certain primary food commodities due to severe weather conditions across the globe reducing the supply, coupled with increased demand after the restrictions were lifted and transport delays). Further, the energy crisis will continue to add fuel in the coming months, but only in terms of the oil price, as gas prices were previously agreed.

The NBS has already taken step in terms of shifting towards more restrictive monetary policy, i.e. it stopped providing dinar liquidity to banks via repo purchase auctions of securities and permitted growth in the repo rate at the reverse repo auctions. The market reacted via moderate growth in MM rates and strong growth in yields on the secondary trading of the locally issued MinFin securities.

Contrary to many CEE markets, where the local currencies started a depreciation cycle since mid-September and added to the inflation, this has been avoided on the Serbian market. The Exchange rate remains well anchored by abundant FDIs flow, FX intervention and historically high FX reserves.

Though energy inflation may raise concerns whether the rate hike cycle should be taken into consideration soon, when it comes to the inflation of food prices, monetary measures have moderate impact in taming inflation, whereas government decisions would do more. In this respect, the government decided to limit the maximum retail price of bread made of type 500 flour to 46 dinars, announcing it would provide intervention from the Commodity Reserves if necessary. We would like to see more decisive approach from the government, as food inflation will remain a cause of concern.

We see NBS will remain hesitant to start hiking the key rate, especially with the new wave of corona and the first sign of the manufacturing industry slowing pace in September. Thus, it will continue to use repo rate as the main instrument for the time being, though it might be considering taking more decisive action in Q1 2022, if energy prices continue to grow.