Inflationary pressure on EMs to ease in 2H2021

July 17, 2021 (MLN): Inflation in the emerging markets (EM) is expected to moderate in the second half of 2021 due to stabilizing commodity prices in the coming months, said the Institute of International Finance (IIF) in its macro notes titled “Are commodity prices a threat to EM inflation” released this week.

Along with the recovery of the global economy from last year’s COVID-19 shock, prices of major commodities have risen markedly as key fossil fuel benchmarks Brent crude, natural gas, and coal have jumped 40%, 17%, and 55% respectively over the last 12 months.

“Higher prices can, thus, boost domestic growth and, in many cases, lead to current account improvements. However, commodity prices are also an important driver of headline inflation dynamics as commodities account for a large share of merchandise imports. Should elevated commodity prices persist—some even call current events the beginning of a commodity supercycle—some EM and FM would be particularly exposed in terms of headline inflation pressure,” added the IIF.

Overall, world energy prices are up by 35% and food prices by close to 20% since the end of last year, driven by higher demand and lingering supply chain disruptions.

Around one-third of Pakistan’s total import bill is due to food and energy imports. The aforementioned increase in global crude prices and the country’s heavy dependence on crude imports to meet its local demand has forced policymakers to seek alternate arrangements to buy-now-pay-later from Saudi Arabia in view to contain the current account deficit.

Meanwhile, local administrative failures forced the country to import food products in the last 10 months increasing the bill by 54% compared to the same period last year.

The CPI Inflation has remained above the 10.5% mark during the last two months and is expected to remain above 11% for June bringing the overall 4QFY21 average to 11.18%.

The inflation, currently testing the upper limit of the State Bank of Pakistan’s average for the FY21, comes despite the government’s reluctance to pass on the higher international crude prices to the consumers fearing rebuke. Meanwhile, the incumbent Finance Minister Shaukat Tareen has hinted at building up strategic reserves of major food items in items to keep prices in check.

However, the IIF points out that although the passthrough from rising commodity prices to higher headline inflation appears to be pronounced, developed, emerging and frontier markets have responded in multiple ways with some developing markets increasing the emergency stimulus and some emerging and frontier markets dialing back their stimuli. 

“We are also concerned that some emerging markets governments may be tempted to bring back price controls on ‘strategic’ or rather socially sensitive goods. Such policies are unlikely to have a meaningful impact on lower-income consumers but will have dangerous repercussions of contaminating the message from the CPI and complicate monetary policy decision making and the transmission mechanism,” it warned.

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