October 31, 2022 (MLN): The headline inflation for the month of October 2022 is expected to settle around 20.7% YoY – 25.7% YoY with an average estimate of 22.21% YoY compared to 23.2% YoY in the last month and 9.2%YoY in October 2021.

This would bring 4MFY22 average inflation to 24.38% as against 8.8% YoY in the corresponding period last year.

On monthly basis, the inflation is expected to move up with an average estimate of 0.99% MoM compared to 1.9% MoM in October 2021, as per the projections put forth by various brokerage houses.

The MoM increase in the CPI is mainly attributed to the surge in food prices. The prices of wheat, onions, tomatoes, and tea will keep inflation elevated as per weekly Sensitive Price Index (SPI) data.

On the other hand, the transportation index may see a drop on the back of a decline in petroleum prices.

The estimated number is broadly in line with the expectation put forth by the Ministry of Finance in its recent report wherein it stated, “CPI inflation will remain in the range of 21- 22.5%.”

The inflationary risks have partially been alleviated due to timely decisions to import perishable items by waiving the customs duties. Administrative measures are also being taken to control price speculation to ease inflation.

Moreover, the declining international commodity prices are expected to offset the inflation spikes that emerged due to domestic supply shocks, it noted.

To recall, after peaking in August, the inflation fell by more than 4% in September to 23.2%YoY, mainly due to a reduction in electricity prices on administrative intervention.

At the same time, the momentum of inflation also slowed by more than expected, declining by 1.2%MoM.

The central bank in its monetary policy meeting held on October 10, 2022, stated that the supply shock to food prices from the floods is expected to put additional pressure on headline inflation in the coming months.

Nevertheless, headline inflation is still projected to gradually decline through the rest of the fiscal year, particularly in the second half. Thereafter, it should fall towards the upper range of the 5-7% medium-term target by the end of FY24, it said.

A continuation of prudent monetary policy and orderly movements in the rupee should help contain core inflation going forward.

Fahad Rauf, Head of Research at Ismail Iqbal Securities told Mettis Global that quarterly house rent revision, higher food inflation, and normalization of electricity tariff are the major reason behind inflation.

To note, there was a negative fuel charge adjustment in Sep to account for Govt relief announcement of Rs10 per unit, pertaining to Jun FCA.

Outlook:

Going forward, inflation is expected to remain elevated however as with a high base effect, the CPI number is expected to come down.

Meanwhile, supply-side constraints will also push core inflation given the deceleration in industrial production due to import restrictions.

According to Jahanzeb Zafar, Head of Research at AKD Securities, energy inflation is to increase in the coming months as temperature drops in the country and the generation mix tilts away from cheaper hydel generation in favor of more expensive gas and coal.

However, slight relief may come from easing food inflation as winters have historically resulted in food inflation easing off. This year, owing to floods, the relief may not be as big but nevertheless, the food inflation may ease off slightly in coming months, he added.

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Posted on: 2022-10-31T16:47:39+05:00

News Id :35690