Azerbaijan: Inflation continues to inch down, but remains in double digits

CAUCASUS / CENTRAL ASIA - In Brief 17 Jul 2023 by Ivan Tchakarov

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The Jun inflation print indicates that, albeit moderating, price growth momentum remains strong. Inflation in Azerbaijan had increased substantially from the lows of 2020 (2.4 percent YoY in Oct’2020) chiefly on account of food prices, but has stabilized in 2022 and so far in 2023, having only marginally inched up from 12.4 percent YoY in Jan’2022 to the peak of 15.6 percent YoY in Oct’2022. Price growth has since been on a steady downtrend, hitting 10.6 percent YoY in June 2023 (Graphs 1 and 2). At the same time, inflation momentum is still strong due to high volatility of the external environment of inflation, excessive expansion of aggregate demand, robust incomes, and fraught geopolitical backdrop. All components of inflation are still running at double digits. Graph 1 Inflation is inching down, but remains elevated Source: Central Bank of Azerbaijan, Author’s calculations. Graph 2 More moderate food inflation is still key to inflation developments Source: Central Bank of Azerbaijan, Author’s calculations.We see inflation continuing to moderate gradually to a forecast 8.0 percent by year-end. The steady downshift in price growth will continue being facilitated by more favorable developments in global food prices, lower inflation in trading partners, helpful base effects and strengthening real exchange rate. Our forecast is also broadly in line with central bank's own projection that Dec inflation will come in at 8.3 percent. Inflation developments in June lend support to our view that the central bank may prefer to ease on the side of caution and consider a rate cut around the start of 2024. While the monetary authorities did signal the end of the rate-hiking cycle...