Annual inflation declined to 6.3% y/y in May, 0.4% y/y lower than April, while prices increased by 0.1% m/m. The lower annual figure was due to further moderation of food price inflation with is currently at 3.7% y/y, down from the 2016 average of 10.8%. Of the twelve basket items, three saw a higher annual inflation rate than the previous month, two remained unchanged, while seven categories saw lower rates of price increases. Prices for goods increased 4.9% y/y while prices for services grew 8.2% y/y, with slower growth in goods prices supported by a stronger Namibian dollar and lower food prices.
Housing and utilities remains the largest contributor to annual inflation due to its large weighting in the basket and the effect of irregularly high rental increases of 9.7% in January. This category increased by 9.8% y/y and 0.3% m/m. Annual inflation for rental payments for dwelling remained at 9.6% in May and will likely remain this high for the rest of the year. Furthermore, NamWater has been granted an approved 13% increase in water delivery, effective on 1 June while NamPower received an approved 8% from the Electricity Control Board effective 1 July this year. The increases in utilities is likely to be passed on to the consumer and should put upwards pressure on this basket category going forward. We continue to expect the housing and utilities basket category to underpin overall inflation.
Transport was the second largest contributor to annual inflation, accounting for 0.9% of the total 6.3% inflation figure. Transport prices increased 7.1% y/y and 0.6% m/m, driven largely by the 7.6% y/y increase in the price of vehicles, but also by the 9.3% y/y increase in the operational cost due to higher fuel prices.
Food and non-alcoholic beverages, the second largest basket item, was the third largest contributor to annual inflation, accounting for 0.7% of the total inflation figure. Food and non-alcoholic beverage prices increased by 3.7% y/y, a further slowdown compared to the 5.8% increase in April, well below the peak of 13.2% witnessed in January. The slowdown in annual food inflation is largely due to lower inflation on agricultural produce resulting from good rainy seasons in parts of South Africa. Bread and cereal prices have decreased by 3.7% y/y, the price of vegetables have decreased by 4.0% y/y and fruits are only 1.5% more expensive on an annual basis.
The Alcohol and tobacco category displayed increases of 3.3% y/y and 0.1% m/m in May versus 3.9% y/y and 0.4% m/m in April. The main driver in this basket category remains alcohol prices which increased by 3.5%y/y while tobacco was up 2.6% y/y. Inflation in this category remains relatively muted despite the announcement of increased sin taxes in March.
Namibian inflation is decreasing at a faster pace than we anticipated at the start of the year. A strengthening rand and a strong decline in food prices has seen inflation moderating substantially. Similarly, South Africa has seen their inflation returning to the target band faster than expected. The rand exchange rate benefited from increased global capital inflows to emerging markets which largely offset the impact of the sovereign credit ratings downgrade. However, the possibility of further downgrades in the future remains a risk for currency weakness going forward, which would likely push inflation higher in both Namibia and South Africa.