July 30, 2020 (MLN): The Pakistan Bureau of Statistics (PBS) is all set to reveal CPI numbers for the first month of FY21, i.e. July’20 in the first week of August’20 which will provide insight to access the current status of the economy.

It is indeed appeasing to see that the rate of inflation in the country continues to be in a single digit and relatively calm since May 2020. However, in the month of July’20 the headline inflation is once again expected to rise but remain in the single digit. The rise in July’20 inflation is expected mainly on the back of sizeable increase in petroleum product and food prices and quarterly revision of houses index.

To recall, in the preceding month i.e. June’20, Pakistan’s headline inflation rose to 8.59% from 8.2% in May’20 and 8% in June’19, largely in-line with market expectations. While on a monthly basis, CPI increased by 0.82% compared to an increase of 0.32% in May’20. This caused the Jul-Jan 2 average inflation to end FY20 at 10.74% compared to 6.8% in FY19.

The weekly SPI inflation data released by PBS is also pointing towards higher inflation this month compared to the previous month as it witnessed a notable increase in prices of Food items which include tomatoes, chilies, onions and eggs. The prices of these items went up by 20%, 15% and 10% respectively mainly on account of Eid season.

On yearly basis, the surge in headline inflation is expected mainly due to the increase in food index which inflated by around 16.59% YoY during Jul-20. Particularly, increase in the prices of wheat flour (14.27% YoY), rice (7.92% YoY), meat (11.32% YoY),chicken (32.36% YoY), fresh milk (11.26% YoY), cooking oil (17.69% YoY), vegetable ghee (22.18% YoY),sugar (18.81% YoY) and condiments (62.62% YoY) contributed to the upsurge of food index.

Other than food prices, an increase in the prices of house rent (3.89%YoY), cotton cloth (14.84% YoY), education (1.05% YoY) and readymade food (7.74% YoY) also pushed the CPI inflation towards the north, a report by Abbasi and Company Pvt Ltd. highlighted.

Whereas, on monthly basis, the inflation is bound to increase on account of significant rise in food index before Eid and surge in transport index due to accretion in petroleum product prices. Meanwhile, quarterly house rent adjustment is also likely to fuel CPI during the month.

In view of the aforementioned factors, analysts expect headline inflation to settle around 9.08% – 8.5% in July’20 with an average estimate of 8.78% YoY compared to 8.59% YoY in June’20, as according to inflation projections put forth by various research houses in the table below.  

On monthly basis, the inflation is expected to increase with an average estimate of 2.10% MoM compared to the inflation of 0.82% MoM in June 2020.

Inflation outlook and possible impact on the policy rate:

As the Monetary Policy Committee (MPC) of the SBP has decided not to hold the regular meeting in July for any monetary actions after reducing policy rate by 100bps to 7% in its emergency meeting, it postponed the MPS till Sept’20 in order to observe the impact of expansionary policy for further two months. However, the chances of rate hike cannot be ruled out as in the coming months, the upward trajectory in the CPI figures are expected to continue.

Summit Capital in its research note highlights that the rising international oil prices due to resuming economic activities may keep the inflation on higher side. Furthermore, tension in geopolitical situation would also reflect in the commodities’ prices.

Shajar Capital is of the view that in the month of Aug’20, CPI to remain on the higher side, mainly due to higher transportation and food indices. Further, the raise in medicine prices in the month ofJul’20, by the authorities, will likely to keep inflationary pressures in economy in the 1QFY21.

On the other hand, Ismail Iqbal Securities does not see any sharp increase in inflation. Although electricity tariff increase is in the offing, the research house believe it would be gradual and high base effect would limit its impact on headline inflation.

On petroleum prices front, the research house believes that government has utilized full limit of Petroleum Levy (PKR30/litre), which could be reduced if oil prices rise further, thus providing cushion to transport segment. Food inflation is also on the rise but SBP has reiterated that food shocks are temporary, while sustainable increase in CPI would remain one of the key indicators for monetary policy.

Another brokerage house Pearl Securities stated that recent hike in food commodities, Petroleum Prices and increase in Power tariff, poses upside risk for inflation. Therefore, the likelihood of a rate cut in consideration with Inflation should not be on the cards in the coming period. However, the growth led rate cut probability cannot be ruled out.

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