September 30, 2021 (MLN): While enduring the roller-coaster ride, the economy is further triggered by a variety of internal and external jolts.

However, the inflation numbers have been not only playing exceptionally well for few months but also uncannily stable on the back of the government’s prudent measures to minimize the covid-19 induced impact on the economy. It is pertinent to mention that inflation has dropped from 11.1% YoY in April’21 to 8.35% in August’21.

Moving on, the Consumer Price Index for September’21 is anticipated to clock in at 8.17% YoY, against 8.35% recorded in the previous month and 9.04% YoY in September’20. The ease off will likely occur on the basis of a marginal increase in food prices amid government intervention and a slightly higher base for the SPLY.

Going by the projections of different brokerage houses, the headline inflation will likely swing around 7.9% – 8.43%YoY.

On a sequential basis, inflation is expected to mark an uptick of 1.31% MoM in September’21 compared to 0.6% MoM in August’21. The increase is mainly attributed to the increase in the food index which inflated by around 3.3% MoM during Sep-21.

Under the food index, the prices of Wheat, Chicken, Eggs, Pulses, vegetables, and Sugar are likely to surge by 7%MoM, 38%MoM, 14%MoM, 2%MoM, 4%MoM, and 3%MoM respectively as compared to Aug’21 prices.

On the Housing & Electricity front, the index will likely inch up by 3.5%MoM in September’21 mainly on the rise in Electricity charges by 7%MoM as per the conditions of IMF. Further, the Furnishing & Household index is likely to rise by 1.1%MoM in September’21 compared to August’21.

Clothing, Housing & Electricity, Transport and Restaurant indices to show a jump of 9.4%YoY, 9%YoY, 12%YoY, 8.2%YoY, and 7%YoY, respectively as compared to September’ 20.

To note, the YoY rise in the Transportation index will likely occur mainly on the rise in Arab Light prices and PKR’s downward journey by 75%YoY and 1.1%YoY, respectively. This has cumulatively augmented the local Petroleum prices by 18%YoY during the month.

PKR: Enough to derail

The surging dollar value against PKR in the interbank market has grabbed the attention of policymakers but no direct intervention can be seen to put a halt against it. The impact has seeped into the domestic market as the downward journey of PKR has pushed the prices to surge as a result of inflating import bill during the month.

Not to forget, the ongoing geopolitical tension pertaining to Afghanistan has put undue pressure on Pakistan’s economy. This has not only created havoc in the interbank market but also slashed the confidence of investors in the local bourse.

In a recent development, the government has announced sales tax reductions on the prices of edible oil and Ghee along with earmarked subsidies for the marginalized household of the country.

The government may likely strengthen their concerted efforts with the utility stores to be able to soften food inflation in the near-term as the upcoming energy tariff and fuel rate hikes are expected to push the non-food inflation more than desired levels, rendering broad inflation to exceed SBP’s medium-term target of 5-7%, said by Wajid Rizvi, Analyst at JS Global.

CPI and Monetary Policy Outlook:

Going forward, the increase in additional food demand from Afghanistan besides increasing local demand, higher prices given the supply constraint, PKR devaluation amid widening current account deficit would keep pressurizing the food index. In addition, the higher international oil prices will inflate the transport cost.

In order to resolve the circular debt issue under IMF conditions likely to increase gas and power tariff which leads to an additional rise in CPI.

Since the accommodative stance has provided enough support to the recovery of the economy since the start of FY-21, SBP in its recent MPC meeting decided to increase the policy rate by 25 bps to 7.25 to keep the growth at moderate levels. In addition, the unfavorable macros such as deteriorating PKR, inflating import bill, and rising international oil prices have also forced the State Bank to take tight measures on the front of monetary policy.

With regards to policy rates outlook, Muhammad Saeed Khalid, Analyst at Shajar Capital noted that the fueling food inflation along with the depreciating PKR, another hike of 39% in electricity rates coupled with the Transportation prices in the follow-through of IMF program and rising international crude oil prices, may likely to increase chances of a hike in interest rates by 25bps-50bps on Nov’21 MPC meeting which will hike interest rates to 7.5%-7.75% in CY21.

 According to Sana Tawfik, Analyst at Arif Habib Limited, the inflation to remain under 8.5% till November’21 with the base effect supporting the YoY numbers. However, as this base effect starts to fade away post-December ’21, we will see a gradual rise in the headline inflation during 2HFY22.

Any abrupt change in tariffs, exchange rate parity and oil prices pose an upside risk to the inflation estimates.

She stated that the MPC 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 is expected to stress the current account.

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