Headline inflation to fall further in the near term, with medium-term upside risk

– We project headline inflation to slow to 4.4% year-on-year (y/y) in July 2024 from 4.6% in June.

– On a month-on-month (m/m) basis, we expect inflation to tick up marginally (0.1% from -0.2% in June) driven by base effects from the food and transport components of the inflation basket.

– We maintain our view that although inflationary pressures have eased recently, the risk of inflation remains tilted to the upside due to factors like dry weather conditions, currency volatility, geopolitical tensions, and unexpected increases in private spending.

We expect Namibia’s headline inflation to have decreased from 4.6% (y/y) in June 2024 to 4.4% in July 2024. This anticipated decline is largely attributed to lower transport inflation, resulting from eased pressures in the personal transport operations and vehicle purchases subcategories. This decrease aligns with the stabilisation of global oil prices recently, and the Ministry of Mines and Energy’s announcement of fuel price reductions announced in July—80 cents per litre for petrol, 60 cents/litre for diesel 50ppm, and 70 cents/litre for diesel 10ppm. Despite the decrease, transport inflation continues to drive headline inflation, and we expect it to contribute 1.1 percentage points (ppts) to the y/y print in July.

We also foresee lower inflationary pressures across key categories such as alcoholic beverages and tobacco, clothing and footwear, as well as housing, water, electricity, and gas categories. This could be attributed to lower demand as consumers remain under pressure given the elevated price and interest rate environment. Moreover, the government’s decision to subsidise the 8% increase in electricity tariffs is expected to keep inflationary pressure in the housing, water, electricity, and gas category tamed, by keeping utility costs unchanged until July 2025.

On the other hand, we anticipate a slight increase in inflation within the food and non-alcoholic beverages category, as favourable base effects dissipate, and low output due to drought conditions are expected to persist. Food inflation is expected to rise to 4.7% y/y in July 2024, up from 4.3% the month before, with notable increases in the bread and cereals subcategory. We also project additional inflationary pressures in the hotels, cafes, and restaurants category, as well as in the miscellaneous goods and services categories. This expectation is in line with growth observed in the tourism sector and strong private spending supporting demand as reported by the 1Q24 national accounts, developments which we attribute to continued oil and gas exploration activities.

Despite an anticipated decrease in domestic inflation, upside risks persist. As a result, we project that inflation will remain high, averaging 4.5% y/y for 2024 and ending the year at 4.2%. The Ministry of Mines and Energy maintained fuel prices in August but noted a slight increase in global oil prices due to geopolitical tensions. Food insecurity remains a major issue, worsened by

a government-declared drought affecting crop yields, dam water levels, and leading to water rationing in some towns. However, La Niña conditions later in the year might bode well for agricultural production. Additionally, food supply risks are expected to be countered by lower aggregate demand due to high prices and persistently high interest rates affecting consumers and businesses.