CPI Preview: Inflation to increase north of 8%

June 29, 2020 (MLN):  As the last month of the current  fiscal year (FY20) nears end, the Pakistan Bureau of Statistics (PBS) is all set to release the numbers for Consumer Price Index (CPI) in the first week of July 2019 which will provide the measure to assess the current status of the economy.

Given the current environment and considering an upsurge in the prices of certain commodities, the headline inflation for the month of June 2020 is expected to increase north of 8%.

To recall, in the preceding month i.e. May’20, Pakistan’s headline inflation eased to 8.22% YoY from 8.53% in the previous month and 8.40% in May 2019, largely in-line with market expectations. While on a monthly basis, CPI increased by 0.32%compared to a decrease of 0.84% in April’20.

The weekly SPI inflation as of June 18, 2020 which is highest since November 2019 as it clocked in at 1.0%, mainly due to rise in prices of  Wheat (+5.0%WoW), Chili powder (+10.2%), Chicken (+2.2%) and Tomatoes (+39.0%), is also indicating towards higher inflation this month compared to the previous month.

Despite reduction in petroleum prices by Rs7 per litre, the increase in CPI numbers is expected largely on the back of drastic surge in prices of Tomatoes, Spices, Eggs and Wheat flour due to higher demand of essential food items along with supply fear of Tomatoes and Wheat in the market. Though, decline in petroleum prices, significant decline in Onions and Fresh vegetables prices and an expected decline in Housing and Transport Index would keep the inflation in check. Moreover, Clothing and footwear index likely to witness an increase possibly due to Eid factor.

Accordingly, analysts expect headline inflation to settle around 9.1% – 8.2% in June’20 with an average estimate of 8.55% YoY compared to 8.2% YoY in May’20, as according to inflation projections put forth by various research houses in the table below.  If this estimate materializes, this will take the average inflation during FY20 to clock in at 10.9% YoY.

On monthly basis, the inflation is expected to increase with an average estimate of 0.74% MoM compared to the deflation of 0.8% MoM in April 2020.

CPI Projections for June 2020YOY (%)MOM (%)
Arif Habib Limited 8.490.8
Al Habib Capital Markets8.460.23
Darson Securities 8.680.9
Insight Securities 8.700.9
Foundation Securities 8.200.40
Shajar Capital8.300.52
Pearl Securities8.801.07
Abbasi and Company Ltd9.101.30
Summit Capital8.200.50
Spectrum Research 8.560.79
Ismail Iqbal Securities8.600.80
BMA Capital 8.40
Range9.1 – 8.21.3 – 0.23
Expected Average Inflation in FY2010.93% 


Inflation outlook and possible impact on the policy rate:

To recall, SBP in a surprise move, reduced policy rate by further 100 bps to 7% to support economic growth amid lower inflation outlook. However, in coming months, inflationary pressure is expected to increase due to significant increase in international oil prices, the continue PKR devaluation, increase in electricity prices and food prices.

Furthermore, the government has increased retail prices of petrol and diesel (HSD) for July 2020 by a staggering 34% and 27% MoM respectively to Rs 101/liter as a result of which CPI will rise by 1 ppt on a monthly basis, keeping  other things remain the same, Intermarket Securities in its research highlighted.

Though, the increased prices will not immediately push inflation into the double digits again, the report added.

These factors provide limited room for SBP to reduce policy rate going forward as the report underscored that recent cuts in the policy rate were partly premised on lower petroleum prices (albeit complemented by soft food inflation and weak aggregate demand taming core inflation). Future CPI readings hovering around 8-9% –with the policy rate recently being cut to 7.0% –will maintain negative real interest rates longer than expected earlier. Therefore, there is a possibility that, if the coronavirus pandemic situation is relatively under control by end-2020, the SBP could look to increase the policy rate, aimed at rebuilding positive real rates.

Similarly, Abbasi and Company believed that the monetary easing cycle has been completed for medium-term as the hike of around 33% in fuel prices has ruled out the chances of inflation to come down to a range of 6-7% in the upcoming two quarters as forecasted by the SBP.

However, a report by Ismail Iqbal Securities indicated that locust attack is a major risk which could completely change the picture and result in price shocks.

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Posted on: 2020-06-30T18:07:00+05:00