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CPI: On the Rampage

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November 2, 2021 (MLN): Finally, the most awaited inflation numbers have been revealed by the Pakistan Bureau of Statistics (PBS) in the later hours yesterday. The soaring Consumer Price Index (CPI) remained too responsive to the global hike in prices during the outgoing month as it has left the footprints on the local products which will likely push the central bank to increase the interest rate in November’21.

 As per the data, the headline inflation for the month of October’21 climbed up by 9.2% YoY, compared to 9% YoY and 8.9% YoY in September’21 and October’20, taking the average inflation rate for 4MFY22 to 8.74% YoY compared to 8.87% YoY in 4MFY21.

On a sequential basis, CPI inched up by 1.9% MoM as compared to an increase of 2.1% MoM and 1.7% MoM in September’21 and October’20, respectively.

The upsurge in the cost of living on a yearly basis came mainly due to an increase in the Food index, Transport, Housing, and Clothing & Footwear by 8.3% YoY, 14.4% YoY, 12% YoY, and 9.3% YoY.

While Restaurant, House Hold Equipment, Health, and Alcoholic Beverages & Tobacco indices have also pressured CPI index to swell by 8.3% YoY, 9.2% YoY, 8.0% YoY, and 1.9% YoY, respectively.  

Whereas, on an MoM basis, the spike in inflation was led by the Housing, Water, etc. index which was up by 2.39% MoM up on the back of a hike in electricity tariffs. In addition to this, the transport index also contributed to an increase in MoM inflation as it soared by 5.27% owing to the significant surge in fuel prices.

However, contrary to the expectations, food inflation showed a stable trend on monthly basis as 35% MoM and 9% MoM rise in chicken and cooking oil prices were set off by 58% MoM, 15% MoM, and 8% MoM decline in Tomatoes, Potatoes, and Onion prices.

During the month, food inflation remained elevated which is reflected by the index of perishable food items (up by 5.92%).

Under the food index, the prices of Chicken, Vegetables, Potatoes, Wheat, Tea, Mustard oil, Vegetable ghee, Gur, Fish, Cooking oil, Meat, Beans and Fruits surged by 17.91%, 15.26%, 12.17%, 7.25%), 4.93%, 4.68%, 2.72%, 2.68%, 2.22%, 1.77%, 1.72%,1.50%, and 1.10%, respectively.

To note, the government has been taking pre-emptive measures to prevent food supply shocks, such as importing wheat and sugar in advance despite good domestic production of both crops.

With regards to Core inflation, which is calculated by excluding food and energy items remained moderate. Urban core inflation is 6.7% YoY in October’21 against 6.4% YoY in September’21 and 5.6% in October’20.

Similarly, the rural core inflation, increased by 6.7% YoY as opposed to 6.2% in the previous month and 7.6% YoY in October’20. Cumulatively, during July-February 2021, Urban and Rural core inflation have averaged 5.6% and 7.7%, respectively.

Moving forward, the Wholesale Price Index (WPI) swelled by 21.18% YoY in October’21. The surging gap between CPI and WPI created an alarming situation which indicates that cost-push inflation will likely hit FY22.

Outlook:

The uptrend in the general price level is expected to continue in the coming months with the onset of global commodity price adjustments.

Moreover, a further increase in electricity tariffs and an uptick in international oil prices are the major concerns to overall inflation. To highlight, petrol price changes have recently been held back by the government and a potentially big change in the future will push CPI higher. 

Future CPI readings will be lifted by an impending power tariff hike of Rs1.39 per kWh, around 9% of the base tariff, an IMF precondition for program resumption, the impact of recent PKR devaluation of 6% YoY – 7% YoY, and potential gas tariff hikes. Petrol prices can be increased by a further 10% YoY if the government passes on the international price increases.

Given this, the estimated CPI to average between 9% YoY-10% YoY during FY22, where the readings could nudge 11% YoY – 12% YoY toward the end of the year, Muhammad Saad, Head of Marketing, Intermarket Securities said.

Having said that, the State Bank of Pakistan may continue to adopt a cautious stance in the upcoming monetary policy in November'21.

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Posted on: 2021-11-02T17:06:44+05:00

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