CPI Review: Tightening unlikely soon?

September 2, 2021 (MLN): As the worst of the pandemic rapidly easing due to mass vaccination drive, inflation talks began heating up globally amid demand recovery.

This ongoing recovery was reflected in the headline Consumer Price Index (CPI) that measures the rate of change in prices. In August 2021, Pakistan saw inflation spike to an 8.4% annual rate as compared to an increase of 8.2% in August 2020, according to the latest data of the Pakistan Bureau of Statistics (PBS).

However, the inflation rate was the same at 8.4% in July 2021, taking the 2MFY22 average inflation to 8.38% YoY compared to 8.74% YoY in 2MFY21.

In recent months, the inflation rate is on a declining trend. The finance ministry in its latest monthly economic Update & Outlook has already mentioned that in the absence of any supply chain disruptions, inflation would remain steady in August due to consistent relief provided by the government in the prices of daily-use items.

On a sequential basis, CPI increased by 0.6% during the month whereby the major contributors to inflation in August were the food index, housing and cost of transportation, adding 0.25, 0.15 and 0.04, percentage points, respectively to CPI Index. Perishable food index recorded a 2.58% MoM increase with items such as tomatoes, onions, cooking oil and fresh vegetables contributing the most to the monthly food inflation. Also, the non-perishable food index too witnessed a jump during the month, up by 0.41% MoM.

The upward price revisions in Liquefied Hydrocarbons’ price contributing to the 0.73% MoM rise in the transportation index. The increase in petroleum prices is explained by higher international crude oil prices as global demand has picked up.

The core inflation considerably slowed down on an MoM basis during Aug’21, from last month’s 0.8% MoM (Urban) and 0.7% MoM (Rural) to 0.2% MoM increase in both.

On yearly basis, the increase in CPI numbers was mainly attributable to the surge in transport, food, clothing & footwear, miscellaneous, housing, restaurants, household & equipment and Alcoholic Beverages & Tobacco by 8.1%, 10.0%, 9.3%, 5.9%, 8.0%, 7.3%, 9.6%, 2.1%, YoY, respectively.

Going forward, with Aug’21 headline inflation clocking in at 8.35%, FY22’s inflation reading is expected to remain within the projected range of inflation of 7-9%7-9% range. inflationary readings may witness some pressure on account of any adjustments in electricity tariff, any further increase in prices of petroleum products owing to an uptick in international oil prices, exchange rate depreciation and surge in prices of non-perishable items.

Taking cues from July’s MPS, it is believed that the primary target of the SBP continues to support the growth momentum in the economy. Therefore, Arif Habib research house expects SBP would keep the policy rate unchanged in September’s policy at 7%.

While Asad Rizvi, Former Treasury Head-Chase Manhattan Bank said, August’s CPI at 8.4% is encouraging news, suggesting an easing of pressure on the rupee. With softer oil & food prices easing, he expects no policy rate hike in September MPS.

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