Upcoming harvest, global development's to further ease inflation

A combination of positive local and international factors including the upcoming main crop harvest season may help reduce inflation further, according to market observers.

Consumer prices continue declining, with annual inflation dropping from 25 percent year-on-year in April 2024 to 23.1 percent in May 2024 – a decrease of 190 basis points (bps).

However, consumer prices saw their sharpest monthly rise this year in May, increasing 3.1 percent from April and signalling ongoing inflation risks.

While food inflation was the main factor behind overall decline in May, dropping to 22.6 percent from 26.8 percent – the lowest rate in 13 months – the food and non-alcoholic beverages sector still accounted for 41.5 percent of total inflation during this period.

“We expect the imminent main crop harvest season to boost disinflation from the food basket,” GCB Capital Research said in a commentary on the official May 2024 figures.

Domestically, the nation is close to completing the second review of its IMF programme.

“The imminent completion of the second review of Ghana’s programme with the IMF and release of catalytic funding should also improve the FX reserve cushion,” it said.

This is expected to trigger a marginal correction, sustaining the disinflationary trend due to relative stability of local currency in recent weeks – lowering import prices.

In addition to the above, analysts and GCB Capital Research believe that with the possibility of geopolitical stability emerging, coupled with the U.S Federal Reserve’s posture, should bode well for oil prices and have a favourable effect locally.

“The UN-backed cease-fire talk between Israel and Hamas shows a pathway to restoring peace, which together with the US Fed’s probable pushback on an immediate interest rate pivot, improves the outlook for crude oil supply,” the note continued.

A dovish Fed can prevent the U.S. dollar from rising sharply, which typically puts downward pressure on oil prices.

GCB Capital Research remained confident that despite some upside risks, particularly utility tariff adjustments in second quarter of the year slowing down the pace of disinflation, the process will continue to the favourable base drift.

This is the phenomenon making current inflation appear lower when compared to the previous year’s elevated levels.

In an investor note, Apakan Securities adopted a more cautious tone regarding the pace of disinflation.

While it forecasted a further decline in annual inflation rate for June 2024, citing last year’s very high inflation rate, the investment firm also warned that a host of risk factors could limit the extent of this decline in second-half of the year.

“We predict a further drop in the annual inflation rate for June 2024; however, the balance of risks tilts to the upside,” the Apakan Securities said.

Despite this optimistic outlook for June, they cautioned that the favourable base drift effect will diminish in coming months – potentially reversing any short-term gains.

Apakan Securities emphasised that while there is still “some room for the CPI base to support the disinflation process in June-2024”, the underlying economic conditions remain precarious.

One of the primary concerns highlighted by the firm is persistent depreciation of the local currency, which has fallen by 20 percent year-to-date. This sharp decline has exerted upward pressure on import prices and overall inflation.

Additionally, high transport fares and elevated ex-pump prices continue contributing significantly to inflationary pressures, further complicating the economic landscape.

Compounding these issues, the Public Utility Regulatory Commission recently announced an increase in electricity tariffs effective May 31, 2024 as part of its quarterly review process.

Apakan Securities warned that this development is likely to trigger second-round effects on related items within the inflation basket.

“These developments could create second-round effects on related items in the inflation basket, capping the disinflation process,” Apakan said.