June 01, 2022 (MLN): Driven largely by the non-volatile food group and transportation index amid supply chain disruptions coupled with sharp PKR depreciation, the consumer price index (CPI) rose to 13.8% annually in May 2022, official data showed, piling more pressure on the incumbent government in days to come after removal of fuel subsidies.
However, the reading for May came in lower than market expectations on the back of a decline in prices of perishable food items such as tomatoes, and fruits amid normalization in prices post-Ramadan.
Last month, CPI touched a two-year high of 13.37% YoY powered by soaring prices of essential food items.
Accordingly, headline inflation during 11MFY22 jumped to 11.29% YoY as opposed to 8.83% from the corresponding period last year.
To counter the downside risks to the economy i.e., external imbalances and elevated inflation, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) in its recent meeting, raised the policy rate by 150 basis points to 13.75% percent.
The central bank believes headline inflation is likely to increase temporarily and may remain elevated throughout the next fiscal year, mainly due to continued engagement with the IMF, as well as the reversal of fuel and electricity subsidies together with the normalization of the petroleum development levy (PDL) and GST taxes on fuel during FY23.
Since September 2022, the central bank has raised the policy rate by 675 basis points which made the real interest rate able to close the real interest rate close to positive territory.
On a month-on-month basis, it inched up by 0.4% as compared to 1.6% MoM in the previous month, with the major impetus to the uptick in monthly prices coming from Non-perishable Food items (accounts for 29.6% in CPI) such as wheat flour, eggs, pulses, etc. and Transport index where higher motor fuel and transport service charges were the main contributors.
This was offset by a sequential decline of 10.8% in prices of perishable Food group, 2.33% drop in Housing & Utilities group having a share of 23.6% in broad inflation’s basket on the back of reduction in electricity tariff which is expected to be rolled back by the government in order to conform to International Monetary Fund (IMF)’s conditions.
Meanwhile, the core inflation measured by non-food, non-energy (NFNE) also registered an uptick, clocking in at 0.7/9.7% on MoM/YoY in urban areas and an alarming 0.9/11.5% MoM/YoY in rural areas.
With an expected rise in power tariff, a direct impact of the recent hike in fuel prices by Rs30 per litre, inflation will remain elevated in the coming months. Moreover, the second-round effect will cause inflationary pressure in other indices as well, the analyst fraternity noted.
JP Morgan, a global leader in financial services in its latest report said that Pakistan’s inflation momentum could stay elevated through 3Q22 if and when energy subsidies are removed, though higher pump prices could be partially offset by the demand destruction from eroding real incomes.
After the recent policy rate hike of 150bps, the forward-looking real policy rate now stands at 3.6%, based on JP Morgan’s FY22 headline inflation estimate of 10.2%.
“This provides some room for CPI upside surprise in the next few months. As such, we are inclined to think that the SBP will stand pat in the next MPC meeting in July,”, it added.
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