January 31, 2023 (MLN): The headline inflation for the month of January 2023 is expected to settle around 25% YoY – 27% YoY with an average estimate of 26% YoY compared to 24.5% YoY in December 2022 and 13%YoY in the same month last year.

This would bring 7MFY23 average inflation to 25.2% as against 10.24% YoY in the corresponding period last year.

On monthly basis, the inflation is expected to move up with an average estimate of 2% MoM compared to 0.5% MoM in December 2022, as per the projections put forth by various brokerage houses.

The persistent spike in inflation is led by higher food prices, increasing energy cost, and house rent adjustment.

“Food inflation is expected to clock in at 38.9%YoY or 2.3%MoM for the month of Jan’23”, the AKD Securities report added.

According to the data published by the Pakistan Bureau of Statistics, increased rates of onion, wheat, chicken, and dry fruits will keep the inflation high, and tomatoes and potatoes will likely provide ease to the inflation index.

Another reason which drives the inflation up in the following month is housing index.

The CPI inflation on YoY basis for January 2023, is forecasted in the range of 24%-26%, Finance Division said in its monthly Economic Outlook issued on Tuesday.

The report further added, “Inflationary pressure is expected to calm down gradually due to flood-led damages which have disrupted the supply of essential items. International commodity prices are showing a downward trend on a YoY basis and its impact will ultimately be transmitted into domestic prices.”

While the government kept the administered prices at their current level to stabilize the overall prices but post floods persistent shortfall of essential crops is preventing inflation to settle down, the FD added.

At present, the country is in dire need of foreign assistance from the International Monetary Fund (IMF) and other friendly countries to cover external debt payments and boost economic conditions.

Recently, SBP disclosed that the country’s foreign exchange reserves are at an alarming level of $6.37 billion and Pakistan needs to set $8 bn in the next 5 months for $3bn repayment, and $5bn rollover.

To get rid of the default situation, the country needs the revival of the ninth review which will be $1.18bn, resulting in economic stability.

A massive rupee devaluation, a hike in petrol and diesel prices by Rs35, provided enough fuel for its worst impact on the inflation index.

Outlook:

Going forward, inflation in coming months will continue to remain high due to the ongoing economic condition of the country.

Mr. Fahad Rauf, Head of Reseach at Ismail Iqbal Securities said, the inflationary pressures are expected to increase, given sharp PKR devaluation, and expected petroleum, electricity, and gas price adjustments. The trajectory would depend upon the size and method of adjustments.

Sana Tawfiq, Research Analyst at Arif Habib said, “We expect pressure mainly emanating from any further energy tariff hikes, weaker currency against the greenback and surge in food prices.”

On the Monetary Policy side, the SBP increased the benchmark policy rate by 100bps to 17% in January 2023 policy.

The SBP in its statement stated that high levels of CPI have been noted and could pick up higher if not “unchecked”.

Hence, the committee felt strongly that inflation must be anchored, as the long-term costs of letting it become entrenched outweighs the immediate costs of bringing it down, so as to embark on a path of price stability and sustainable growth.

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Posted on: 2023-01-31T21:41:39+05:00