July 31, 2023 (MLN): After witnessing the plague of inflation which had mercilessly ruined the economy in FY23, the Consumer Price Index (CPI) will likely ease at around 26% in July 2023, offering a glimmer of hope for the nation's citizens.

Thanks to the high base effect, which has started kicking in, the economy is showing promising signs of recovery, as indicated from the positive indicators witnessed in the first month of FY24. These positive indicators are signaling a potential turnaround and instilling optimism among the populace.

According to our estimates, the headline inflation for July 2023 is expected to settle around 25%-27% with an average estimate of around 26% YoY compared to 29.4% YoY in the last month and 24.9% YoY in July 2022.

On a sequential basis, the CPI would likely surge by 1.18% compared to the 0.3% MoM increase in the month of June 2023.

The estimated inflation numbers for the month of July are in line with the projection put forth by the Ministry of Finance which stated that the inflation is expected to remain in the range of 25%-27%.

The ease in CPI is mainly due to the recent decrease in administered prices of petrol and diesel which has transmitted into lower domestic prices of essential items by impacting the transportation cost.

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

The benchmark index of international food commodity prices declined again in June 2023 led by price decreases for major cereals and most types of vegetable oils. The timely measures taken by the government to boost the agriculture sector (Kissan Package) would result in a better crop outlook and smoothen domestic supplies.

On the policy front, the SBP has played a vital role to reign inflation by adopting contractionary monetary policy. Since September 2023, SBP has been increasing the policy rate by 1,450 basis points but the real interest rate is still hovering in the negative territory at 7.4%.

Outlook:

Though the July inflation numbers will come as a relief, the outlook is not so promising as the country is in the so-called Standby Agreement with IMF, and that too on stricter terms pertaining to energy tariff, rolling up subsidies, and increasing revenue collection.

Besides, the hike in interest rates will add extra pressure on the cost of production of the major sectors which will ultimately be transferred to the end consumer, posing a threat of another inflationary peak.

In addition, the global volatile prices of commodities mainly oil in the international market will remain the key component to aggravate and calm the inflation tides. 

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Posted on: 2023-07-31T15:44:39+05:00