May 30, 2020 (MLN): Following the previous month, when a country witnessed a fall in headline inflation to single digit after a hiatus of 8 months, the inflation is expected to remain flat in the month of May’2020.

Before the pandemic, inflation readings were used to be important for central bank’s monetary policy decision as objective of SBP’s monetary policy was to deliver price stability in the country. But, in the current environment when pandemic is raging, SBP has shifted its focus towards financial stability in the country as inflation is not a concern especially when borrowing cost is expected to reduce further.

As the lockdown situation driven by coronavirus pandemic pushed down May’20 consumer prices, but due to surge in food related inflation attributable to Covid-19 related lockdown coupled with Ramadan and Eid related buying,  analysts expect headline inflation to settle around 7.9% – 8.7% in May’20  with an average estimate of 8.35% YoY compared to 8.38% in May’19 and 8.53% in Apr’20, as according to inflation projections put forth by various research houses in the table below.  If this estimate materializes, this will take the average inflation during 11MFY20 to clock in at 11.148% YoY.

On monthly basis, the inflation is expected to increase with an average estimate of 0.41% MoM compared to the deflation of 0.8% MoM in April 2020.

Due to Ramadan and Eid, the prices of food items fueled up owing to surge in demand, thus the upside move of food inflation is likely to offset the impact of decline in petroleum product prices. However, the drop in Petrol, HSD and LPG prices may help in managing Transport, Water, Electricity and Gas related inflation segment of the CPI basket.

According to SPI data released by PBS, out of 51 items in the SPI basket, 19- recorded an increase, 12-witnessed a decline while the rest of the commodities remained unchanged. Within food items, major price increase was witnessed in chicken, potatoes and fruits which up by 41%, 32% and 11% respectively.

Going forward, the inflation is expected to remain lower in the near-term due to muted recovery in crude oil and sufficient food supply as federal government has announced subsidies to farmers on fertilizers/tractors during Kharif Season. In addition to this, OGRA is also expected to recommend further reduction in petroleum prices which will keep inflation on lower side.

According to the Spectrum research, the appreciation in PKR against USD due to contraction in current account deficit, healthy foreign flows and expected delay in debt servicing would reduce imported inflation in the short run.

Considering the near future inflation outlook, SBP is not expected to bring further cut in policy rate as it has passably reduced the policy rate by 525 bps to 8%. However, it may provide relief if aggregate demand falls below from expectation, research note by Insight Securities highlighted.

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