April 30, 2021 (MLN): The country is expected to witness its first double-digit CPI figure in FY21, as the headline inflation during the month of April 2021 is likely to clock in between 10.6%- 11.2% with an average estimate of 10.89% YoY which is 13-month high, compared to 9.05% YoY in the previous month and 8.55% YoY in April 2020.

This would bring 10MFY21 average inflation to 8.62% as against 11.42% in the corresponding period last year, largely within the SBP’s estimate of 7-9% YoY CPI in FY21.

With that, Pakistan’s real interest rate is expected to plunge further into negative territory i.e., just under minus 4%.

Going by the projections put forth by various research houses, on monthly basis, inflation is expected to escalate with an average estimate of 0.83% MoM compared to the increase of 0.36% MoM in March 2021.

To recall, since Apr’20 the inflation levels were remained in single digit, however the persistent rise in food prices mainly due to legacy supply issues, increase in electricity tariff and lower base of the same month last year (as April’20 was under an economic lockdown) are expected to drive the CPI in double-digit. The last time double digits CPI was recorded in March 2020 (10.24% YoY), after which it hit a low of 5.7% in January during the ongoing fiscal year due to the high base effect. Following this, the headline inflation started resurging and reached 8.7% in February and 9.05% in March, driven by the low base effect and higher food prices. This rise in inflation was less demand-driven than caused by supply-side shocks.

On monthly basis, the upsurge in inflation is likely on the back of an uptick in food prices owing to Ramadan and supply-side issues. Furthermore, an upward adjustment in house rent index, increase in clothing and footwear coupled with a jump in communication will lend further momentum to the MoM readings. However, after Ramadan, the food prices will be somewhat normalized as evident from historic data.

Quite the opposite, the Ministry of Finance, in its latest Economic Outlook projected April's inflation to remain between 8.0-9.5%. The ministry was of the view that while energy prices may have transitory effects on inflation, the government’s measures to control food inflation are expected to be more permanent. Meanwhile, any surge in international commodity prices may be offset by the stronger exchange rate. Furthermore, in the absence of new supply shocks, it expects the YoY inflation may go down starting FY22 owing to a favorable base effect.

Inflation and Interest Rate Outlook:

Even if the prevailing double-digit inflation is temporary till May’21 due to Ramadan’s seasonality, analysts expect that supply-side imbalances, with an increase in electricity and lower base effect, would keep the inflation on a higher side in the remaining fiscal year. In addition, the government also revised its target inflation for FY21 at 8.7% versus 6.5% earlier.

On the other hand, low international oil prices and PKR remaining strong against the greenback will help keep inflation in check.

The given inflation trajectory, along with the resurgence in Covid-19 cases and the possibility of a border lockdown have increased downside risks to the nascent recovery. That said, it is expected that the State Bank of Pakistan (SBP) will maintain the status quo in the upcoming monetary policy announcement, scheduled in May’21, hence closing this fiscal year at the same rate.

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