CPI Preview: Higher food prices to upswing September’s inflation

September 30, 2020 (MLN): The headline inflation for the month of September 2020 is expected to settle around 8.08%- 8.66% with an average estimate of 8.42% YoY compared to 8.2%YoY in the last month and 11.38%YoY in September 2019, as per the projections put forth by various brokerage houses.

This would bring 3mFY21 average inflation to 8.64% as against 10.73% in the corresponding period last year.

On monthly basis, the inflation is expected to move up with an average estimate of 0.97% MoM compared to the inflation of 0.63% MoM in August 2020.

The food and beverages group which is expected to witness yet another increase due to flood related damages, is the major factor in stimulating monthly inflation, as the SBP in its recent monetary policy statement also highlighted that supply shocks to food prices have increased inflation forecasts.

Taking cues from the weekly SPI data, among major food items, the upsurge in the price of Wheat, Chicken, Eggs, Tomatoes, Fresh Fruits, Rice and Pulses are likely to drive the food inflation.

On the other hand, non-food inflation is likely to soften as petroleum prices have remained stable for Sep-20, while electricity price adjustment for Sep-20 is also not expected to be material.

A report by BMA Capital states that in contrast to food inflation, Non-Food-Non-Energy (NFNE) inflation is expected to show benign readings during Sep’20. The percentage difference between the two indices has consistently touched the levels seen in CY08 and CY10. Nonetheless, improved FX buffers have opened up an opportunity for the govt. to import food commodities to counteract hiking food prices in the country. That said, tender for import of 0.3Mn tons of wheat has already been floated.

It further highlighted that persistently high food prices since Aug’19 period may also induce a second round effect in terms of increases in the NFNE but these increases will likely be spread out over a longer period of time and seem to be well-anchored in SBP’s long term inflation expectations.

On the transportation front, the index is likely to decline in the month of September on account of reduction in expected average local petroleum and OPEC prices. Restaurants and Hotels group however, is expected to witness an upsurge as the demand for ready made food items has increased following easing in lockdown across the country.

According to the report by Ismail Iqbal Securities, in next 5-6 months, inflation trajectory  is expected to maintains its downward trend due to high base effect, wherein inflation is expected to bottom out in January 2021, however, the possibility of food price shock cannot be ruled out which may steepen the curve earlier.

Another report by Spectrum is of the view that average inflation would remain on the higher side going forward due to food supply constraint along with circular debt adjustment in electricity prices. Moreover, the rupee devaluation also poses threat to the increase in utility prices. In addition to that, any upward movement in international oil prices coupled with any downturn in textile exports could trigger for the widening trade balance that may also negatively impact the stability of current account and PKR valuation against USD.

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