March 31, 2021 (MLN): The headline inflation for the month of March 2021, is likely to continue its upwards trajectory owing to high food inflation and an uptick in the housing and clothing index.
Going by the projections put forth by 11 brokerage houses, the inflation is expected to hover between 9.2%-11.5%. The average estimate is likely to reach a 12-month high of 9.63% YoY compared to the inflation figure of 8.7%YoY in the last month and 10.24%YoY in March 2020. This would bring 9MFY21 average inflation to 8.42% as against 11.54% in the corresponding period last year, largely within the SBP’s estimate of 7-9% YoY CPI in FY21.
However, the Ministry of Finance in its latest Economic Outlook projected March's inflation to remain between 7.9% to 9.5%.
On monthly basis, inflation is expected to escalate with an average estimate of 0.91% MoM compared to the increase of 1.8% MoM in February 2021, mainly due to soaring prices of chicken, milk, eggs, and fruits, while lower energy prices due to Fuel Cost Adjustment (FCA) may ease some inflationary pressure.
The expected YoY increase in the cost of living is driven by an upsurge in food, housing, and clothing prices as indicated by the Sensitive Price Index (SPI) data so far. The food index which is not coming under control is expected to inflate by around 13.06% YoY during March’21, compared to 9.7% YoY in the previous month. The major contributors to the upsurge in food inflation include; wheat flour (17.52% YoY), rice (8.38% YoY), meat (10.05% YoY), chicken (36.36% YoY), fresh milk (15.62% YoY), cooking oil (16.82% YoY), vegetable ghee (19.50% YoY), sugar (24.72% YoY) and condiments (35.12% YoY). Other than food prices, an increase in the prices of house rent (16.49%YoY), cotton cloth (21.05% YoY), education (0.88% YoY), and readymade food (9.73% YoY) also expected to push inflation towards the north.
With regards to perishable food prices, the recent weekly data suggests that they are also on the rise, the impact of which will be reflected in the coming months.
| CPI Projections for March 2021 | YOY (%) | MOM (%) |
|---|---|---|
| Spectrum | 9.50 | 0.73 |
| Summit Capital | 9.80 | 1.1 |
| Arif Habib Limited | 9.24 | 0.54 |
| Ismail Iqbal Securities | 9.30 | 0.60 |
| Aba Ali Habib Securities | 9.27 | 0.57 |
| Abbasi and Company Limited | 11.50 | 2.60 |
| Pearl Securities | 9.70 | 0.95 |
| Next Capital | 9.50 | 0.80 |
| Foundation Securities | 9.20 | 0.50 |
| IGI Securities | 9.50 | 0.90 |
| Darson Securities | 9.43 | 0.72 |
| Range | 11.5 – 9.2 | 2.6 – 0.5 |
| Mode | 9.50 | – |
| Median | 9.50 | 0.73 |
| Average | 9.63 | 0.91 |
| Expected Average Inflation in 9MFY21 | 8.42% | |
Furthermore, an upward adjustment in the food group due to Ramzan’s seasonality and the series of electricity price adjustments that are in the pipeline (base-tariff, quarterly adjustments, surcharge, etc.) may push-back inflation to double-digit territory in the months ahead. The last time double digits CPI was recorded in March 2020 (10.24% YoY), While the base effect would lower it down from Jul’21, nevertheless, inflationary fiscal measures such as a hike in gas and electricity tariff with continued food supply shock would restrict the deceleration in inflation going forward.
In the latest monetary policy statement, SBP stressed on the continuation of accommodative policy rates for economic recovery. SBP highlighted that the recent spike in CPI is due to supply-side factors and expected to fall in the range of 5-7% over the medium term. However, they intended to lift the provided stimulus when the economy started moving in full swing and may go for a positive real interest rate like before. However, they are in no rush to raise the interest rate under the prevailing scenario (third covid wave) and will wait for the economic numbers to suggest any changes.
On the upside, PKR has continued to strengthen against the USD, rising nearly by 9% from its high (168.36) mainly on the back of the current account surplus of $881 million, higher remittances (up by 24% YoY), and a tiny increase in imports (up by 4% YoY) during 8MFY21. Also, the country has officially entered into the IMF program but this would lead to a substantial rise in electricity prices and removing corporate exemptions which will create inflationary pressure in the coming months. Nonetheless, average inflation will remain under SBP’s target for FY21 as the government has implemented policy measures to improve the functioning of some segments of the food market and to re-enforce the supply chain of particular food products. These interventions contribute to contain inflationary pressure in those markets. These measures have dampened the direct impact and the expected second-round effects on other CPI components.
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