CPI Preview: Inflation likely to ease at 25% in November

November 30, 2022 (MLN): After enduring rough tides in the previous few months, the headline inflation, with a relatively stable economic landscape, will likely ease at 25% YoY in November 2022, compared to 26% YoY in the last month and 11.50% YoY in November 2021.

This would bring 5MFY23 average inflation to 25.4% as against 9.3% in the corresponding period last year.

This estimation is largely in line with the expected inflation by the Monthly Economic Update & Outlook by the Ministry of Finance which said, “CPI inflation on a YoY basis will marginally decline in November and may remain in the range of 23-25%.”

Inflationary pressure is expected to marginally ease out MoM due to smooth domestic supplies, unchanged energy prices in November, and a stable exchange rate. Further, the recent PM Package for agriculture has made an optimistic crop outlook which will decelerate food inflation in the months ahead.

Moreover, the food supply chain disruption caused by flash floods is also settling down which has smoothened the food and other related markets, the outlook added.

Thus, food inflation is also expected to remain on the lower side because the administered prices are maintained restricting the pass-through of energy-led inflation.

On monthly basis, the inflation is expected to move up with an average estimate of 1.74% MoM compared to 4.7% MoM and 3% MoM in November 2021, as per the projections put forth by various brokerage houses.

Taming Inflation:

In an attempt to tame the inflation further, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) raised the policy rate by 100 basis points (bps) to 16%, saying that inflationary pressures have proven to be stronger and more persistent than expected.

It is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis, it noted further.

Keeping the importance of cost-push inflation in view, the SBP said, “The rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.”

Slowdown Economic Activity:

On the one hand, inflation is on an upward trajectory due to the supply shock following the devastating floods and on the other hand, the growth prospects have weakened, which should reduce demand-side pressures.

The continuous slowdown in economic activity following the earlier fiscal and monetary contraction which can be witnessed from the declining trend of growth indicators such as cement sales, car sales, and OMC plunged by 20% YoY, 47% YoY, and 22% YoY in 4MFY23. Likewise, the Large Scale Manufacturing Index (LSMI) remained flat in 3MFY23. Similarly, the agriculture sector is also facing the worst fate of all time.

It is also pertinent to mention that the 4MFY23 current account deficit has dropped 47% YoY compared to the SPLY, mainly on account of lower imports while net foreign direct investment also decreased by 39% YoY.

Outlook:

Going forward, inflation is expected to remain elevated however, with high base-effect headline numbers is expected to come down.

Meanwhile, supply-side constraints will also push core inflation given the deceleration in industrial production due to import restrictions.

According to Jahanzeb Zafar, Head of Research at AKD Securities, energy inflation is to increase in the coming months as temperature drops in the country and the generation mix tilts away from cheaper hydel generation in favor of more expensive gas and coal.

However, slight relief may come from easing food inflation as winters have historically resulted in food inflation easing off. This year, owing to floods, the relief may not be as big but nevertheless, the food inflation may ease off slightly in coming months, he added.

Copyright Mettis Link News

Posted on:2022-11-30T17:56:03+05:00

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