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CPI Preview: Inflation to clock in at 8.68% YoY in Oct’21

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October 29, 2021 (MLN): The roaring energy prices in the global market have made survival difficult for the citizens of developing countries, where the crawling per capita income can never be imagined to meet the skyrocketing prices. Particularly, the month of October remained choppy as the jolt of international soring prices has been felt heavily through rising energy and food prices at the local front.

Considering this, the headline inflation for October 2021 is expected to settle around 8.2% – 9% with an average estimate of 8.68% YoY compared to 8.98% YoY in the last month and 9%YoY in October 2020, as per the projections put forth by various brokerage houses.

This would bring 4MFY22 average inflation to 8.61% as against 8.86% YoY in the corresponding period last year. To note, this is within the range of SBP’s inflation forecast of 7-9% for FY212.

CPI Projections for October 2021

YoY

MoM

Shajar Capital

8.9

1.6

JS Global

8.2

0.9

Sherman Securities

8.8

1.5

Arif Habib Limited

8.53

1.3

Foundation Securities

8.8

1.6

Spectrum Securities

8.54

1.29

AKD Securities

8.94

1.66

Taurus Securities

9

1.72

Abbasi & Company Limited

8.4

1.2

Average

8.68

1.42

Range

8.2 – 9

0.91.72

Expected Average Inflation 4MFY21

8.61

On monthly basis, the inflation is expected to move up with an average estimate of 1.42% MoM compared to 2.1% MoM in September 2021. The increase is primarily attributable to the increase in transport index by 5.8% MoM, household equipment (1.9% MoM), housing (1.3% MoM), and food (1.1% MoM).

On the back of the government’s intervention to control the prices of food items, the pace of MoM increase in the food index is likely to slow down. Meanwhile, Chicken, Tomatoes, and Potatoes are likely to be the major contributors whereas, Fresh Fruits, and Onions would lower the impact.

On the transportation front, the upsurge in the prices of petroleum products is likely to keep the transport index up by 5.8% MoM, a report by Arif Habib underlined.

In addition, the quarterly house rent adjustment, surge in construction cost, LPG, and washing detergents prices push the Housing and Household equipment indices to witness an uptick of 1.8% MoM and 2.2% MoM, respectively.

Talks with IMF and PKR:

According to the media reports, the government is in the final phase of the discussion with IMF on the revival of the suspended 6th review of EFF program. The government is quite hopeful for the positive conclusion that would support macroeconomic stability to some extent.

The inflows under the said funding will ease the pressure on the domestic currency as the funding would improve the current status of foreign exchange reserves.

Presently, the SBP reserves are on a downward journey on the back of the soaring import bill. As per the weekly data released by SBP yesterday, the foreign exchange reserves witnessed a decline of $346m to stand at $17.14bn as of October 22, 2021. However, the market participants are still waiting for the final outcome of the above-mentioned talks.

The resumption of IMF program would definitely an upside risk to inflation outlook given the expected hike in energy price and new taxation measures.

The delay in outcome of talks with IMF, soaring import bill, geopolitical situation and rising commodity prices have badly hit the PKR’s value in the interbank market. According to the data compiled by Mettis Global, the domestic unit has depreciated by 8.22% or PKR 14.11 in the fiscal year-to-date against the USD. Similarly, the rupee has weakened by 6.89% or PKR 11.82 in CY21, with the month-to-date (MTD) position showing a decline of 0.58%.

Nonetheless, PKR gained Rs2.3 against the USD during the last week of October after the announcement of Saudi support of $4.2billion.

CPI and Monetary Policy Outlook:

Oil and other energy prices continued to surge to multi-year highs and most of the food inflation has continued to remain stubborn owing to pent-up demand from the pandemic.

The jump in energy costs and upcoming electricity tariff adjustments make a case for second-round impacts of inflation and increase in long-term inflation expectations, which will likely be more visible during 2HFY22, Wajid Rizvi, Head of Strategy and Economy at JS Global said.

On the monetary policy front, in its Sept’21 policy, the State Bank of Pakistan (SBP) finally resumed monetary tightening by hiking the benchmark policy rate by 25bps to 7.25%. The MPC, as previously, reiterated that the policy response should transition from prioritizing growth to now ensuring sustainability.

Although inflation remains contained, vigorous domestic growth coupled with multi-year high international commodity prices are expected to stress the current account, Sana Tawfik, Analyst at Arif Habib Limited noted.

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Posted on: 2021-10-29T20:13:31+05:00

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