Aug’21 CPI likely to settle at 8.3% on signs of easing food prices

August 31, 2021 (MLN): With the ease of food price pressure and an increase in fuel rates, the cost of living, as measured by the consumer price index (CPI) is likely to clock in at 8.30% YoY in August’21 compared to 8.4% in July’21 and 8.21% in August’20.

This would bring 2MFY22 average inflation to 8.35% as against 8.75% in the corresponding period last year.

In the latest batch of inflation previews by brokerage houses, inflation is likely to settle in between 8%- 8.6%. However, the Ministry of Finance in its latest Economic Outlook projected that ceteris paribus, inflation will likely fluctuate around 7.6% – 9.2% in August 2021.

On a monthly basis, the inflation is expected to move up with an average estimate of 0.53% MoM in August’21 as build up in prices across all segments will partially be countered by flattish food inflation, down by 0.08%MoM vis-à-vis 1.74%MoM uptick in July’21 partly attributable to seasonal factors.

Running through the weekly Sensitive Price Index (SPI) data published by the Pakistan Bureau of Statistics (PBS), among major food commodities, the prices of chicken, fresh fruits and pulses are expected to register the most decrease, keeping a tight grip on monthly inflation while fresh vegetables, onions and cooking oil are expected to witness strongest gains of 13%, 6% and 4%, MoM, respectively. To note, this increase in cooking oil prices is mainly attributable to higher international palm oil prices and exchange rate devaluation.

Pakistan’s inflation rate is mainly driven by current and past fiscal and monetary policies, international commodity prices, USD exchange rate, seasonal factors and economic agents’ expectations concerning the future developments of these indicators.

Being the net importer of key food items such as wheat, sugar, edible oil and pulses, the current upsurge in international food prices amid the coronavirus pandemic makes the country imperative to build strategic reserves of essential commodities to bring stability in the prices of daily-use items. The coronavirus pandemic has played havoc with global food prices due to supply chain disruptions. However, the government has been consistently providing relief, keeping overall inflation in check, the ministry noted.

While ease-off in food inflation is expected to partially offset by a rise of transportation index contributing most, +2.4%MoM as a result of MS/HSD witnessing upward price revisions of 6.3% and 2.3%, MoM, respectively, according to the research report by AKD securities.

Consequently, Urban inflation is expected to clock in at 8.4%YoY in the current month compared to 8.7%YoY in Jul’21 whereas rural inflation is likely to stand at 8.35%YoY in Aug’21 vs. 8.0%YoY in the previous month.

On the monetary policy front, the Central Bank, in the coming months, might find itself in a tough spot between maintaining an accommodative stance for growth to be all-inclusive and sustainable, and the need to reduce pressure on exchange rate potentially coming from exogenous factors and its consequent impact on inflation (as seen in regional countries). However, as indicated by SBP, any future rate increase would be gradual which is unlikely to materially alter the current set of fundamentals, said Hamza Kamal, Senior Investment Analyst at AKD.

Moreover, taking into consideration soft commodity prices which should keep the energy inflation under-check tagged with a contained NFNE inflation (5.5%-6.5%), there are considerable reasons for SBP to delay interest rate reversal. Importantly, if the SBP decides to tighten the monetary policy, it will start with a 25-50bps increase, to maintain the balance between growth and inflation, Sana Tawfik, Analyst at Arif Habib Research (AHL) highlighted.

However, going forward it is expected that inflation is likely to remain in check on account of any adjustments in electricity tariff, any increase in prices of petroleum products owing to an uptick in international oil prices and surge in prices of non-perishable items. According to SBP in its last monetary statement, the headline inflation should begin to dissipate more visibly in the second half of the year when the February electricity tariff increase drops out of the base, converging to the 5-7 percent target range over the medium term.

 

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Posted on: 2021-08-31T16:36:00+05:00

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