August 31, 2022 (MLN): Navigating the tide of an economy like Pakistan has already been a hard nut to crack and at the same time, catastrophic monsoon floods hitting the ground have made matters worst. The fear of food shortages on supply chain disruption is started being reflected in spiraling inflation.

Accordingly, the CPI for August 2022 is expected to settle around 25.78%-27.6% with an average estimate of 26.74% YoY compared to 24.9% YoY in the last month and 8.4% YoY in August 2021.

This would bring 2MFY23 average inflation to 25.8% as against 8.4% in the corresponding period last year. While on monthly basis, the inflation is expected to move up with an average estimate of 2% MoM compared to the inflation of 1.3% MoM in August 2021, as per the projections put forth by various brokerage houses.

The upsurge in inflation is accredited to the significant hike in food prices. Going into the insights provided by PBS, within the food basket, the prices of potatoes, tomatoes, pulses, meat, and onions have further spiked inflation.

Moreover, the housing index is also likely to remain on the upside on the back of higher electricity charges. However, the transportation index is likely to post a decline on the back of a decrease in average prices of MS and HSD.

In an attempt to reign out the inflationary pressure and cool the overheating economy, the State Bank of Pakistan (SBP) has raised the policy rate by a cumulative 800 basis points since last September.

To note, in the recent MPC meeting, the central bank kept the policy rate unchanged at 15%, expecting the measures to work their way through the system over the coming months.

With regards to July inflation, SBP said, “This was expected given the necessary reversal of the energy subsidy package—effects of which will continue to manifest in inflation out-turns throughout the rest of the fiscal year—as well as momentum in the prices of essential food items and exchange rate weakness last month.”

Ministry of Finance in its monthly economic outlook also said that inflation has continued to accelerate in recent months, mainly due to supply shocks that have created very significant monthly impulses on the CPI level.

If these monthly impulses can be contained to more normal levels in future months, inflation may start to decelerate. But even then, YoY inflation may stay in double-digit for the rest of the current fiscal year, it added.

However, with the ongoing climate catastrophe, the impulses cannot be contained to a normal level by any means due to huge destruction which has jolted the supply chain at so many levels.

Furthermore, with the already weak economy, it will take a notable period of time to restore supply chain flow.

Inflation outlook:

Owing to the historic floods and resultant supply chain disruption, the food prices have already increased by manifolds, putting many necessary items under this basket out of the reach of the citizens.

Thus, the analyst fraternity and economists are of the view that there will be no respite in soaring inflation numbers as the situation keeps on worsening and the lag impact will be more devastating.

As data on the scale of the damage is still emerging and the damage to crops is mostly concentrated in the Southern provinces where reports suggest severe hit to cotton, sugarcane, and other crops, Zeeshan Azhar, Analyst at Foundation Securities said.

Meanwhile, the impact of floods would result in higher agricultural imports but this would be balanced by domestic demand destruction amid tight monetary policy and recession risk in developed markets.

Resultantly, a lower import volume of petroleum products, coal, and automobiles is expected, he added.

Looking ahead, SBP e that headline inflation will peak in the first quarter before declining gradually through the rest of the fiscal year.

SBP in its recent MPC statement said that headline inflation is projected to peak in the first quarter before declining gradually through the rest of the fiscal year.

Thereafter, it is expected to decline sharply and fall to the 5%-7% percent target range by the end of FY24, supported by the lagged effects of tight monetary and fiscal policies, the normalization of global commodity prices, and beneficial base effects, it noted.

Nonetheless, the rapid surge in prices in turn to climate catastrophe would erode consumer confidence and cast a shadow of uncertainty over the economy in the near term.

Copyright Mettis Link News

Posted on:2022-08-31T15:00:40+05:00

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