October 4, 2021 (MLN): The upsurge of prices in the global commodity market has seeped its impact into the domestic market which is reflected through the recently published numbers of the Consumer Price Index (CPI) by the Pakistan Bureau of Statistics (PBS).
Right after the record increase in the oil prices globally, the scary buzzword has made its way to catch the attention of policy-makers. Gone are the days, wherein the inflation numbers eased off amid favorable macros.
The month of September saw a notable jump in consumer product prices by 8.98% YoY- struggled to remain close to the single-digit as compared to an increase of 8.35%YoY in August’21 and 9.04%YoY in September’20.
This takes average inflation of 1QFY22 to 8.58%YoY compared to 8.84% in 1QFY21, while Urban and Rural CPI during FY21 clocked in at 10.8% YoY and 9.1% YoY respectively.
It is pertinent to mention that a 2.21% MoM hike in the prices on a monthly basis is contrary to the market consensus. This increase is primarily owing to the surge in food prices and power tariffs for consumers during the month.
On a sequential basis, the food index inched up by 4% MoM. Under the food index, the prices of perishable food items such as wheat, poultry and fresh vegetables recorded an increase of 3.35% MoM. Likewise, the non-perishable food index also witnessed a rise of 4.13% MoM.
Furthermore, the hike in the price of petroleum products on the back of higher international oil prices has forced the transport Index to moved up by 1.34% MoM. Similarly, on account of rising electricity charges, the housing index expanded by 1.62% MoM.
The surge in YoY inflation is primarily attributed to the increase in food, transportation, housing, clothing and footwear, miscellaneous, restaurants, household equipment, health, and Alcoholic Beverages & Tobacco indices by 10.2% YoY, 9.1% YoY, 9.7% YoY, 9.2% YoY, 7.4% YoY, 9.3% YoY, 8.0% YoY 2.0% YoY, respectively.
During the month of September’21, the Urban core inflation witnessed a slight increment to 6.4% YoY compared to 6.3% in August’21, whereas the Rural core inflation remained stable at 6.2%. It is prudent to mention that core inflation has come down from its latest high of 7% in urban areas and 7.7% in rural areas in April’21.
Moving forward, the increase in additional food demand from Afghanistan besides increasing local demand, higher prices given the supply constraint, PKR devaluation amid widening current account deficit would continue to pressurize the food index. In the same way, the higher international oil prices would inflate the transport and energy cost.
Consequently, FY22’s inflation reading is expected to remain closer to the higher end of SBP’s target range of 7-9%. Any abrupt change in tariffs, exchange rate parity, and oil prices going forward, pose an upside risk to the inflation estimates, Sana Tawfik, Analyst at Arif Habib Limited underlined.
Wajid Rizvi, Analyst at JS Global stated that despite the recent efforts by the government to curb the import of non-essential items, the elevated momentum in food and fuel prices continues to pose risks to SBP’s medium-term inflation target of 5-7%, which is also slated to be impacted by paring of base effect in the early months of FY22.
With regards to monetary policy, given the ongoing macros, further monetary tightening in the Nov’21 SBP-MPC meeting is expected, Mustafa Mutansir, Head of Research at Taurus Securities said.
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