November 30, 2020 (MLN): The headline inflation for the month of November 2020 is expected to clock in at around 7.94%-8.68% with an average estimate of 8.42% YoY compared to 8.91%YoY in the last month and 12.8%YoY in November 2019, as according to the projections put forth by various brokerage houses.

This would bring 5MFY21 average inflation to 8.77% as against 10.8% in the corresponding period last year. To note, this is within the range of SBP’s inflation forecast, moreover, SBP in its most recent Monetary Policy Statement restated its belief of inflation clocking in between 7% – 9% during FY21.

On monthly basis, the inflation is expected to slow down with an average estimate of 0.56% MoM compared to the inflation of 1.70% MoM in October 2020.

Running through the weekly SPI data for the week ended Nov 11, 2020, the major factor accountable for decelerating MoM inflation in Nov’20 include relatively  tamed Food inflation compared to previous month on the back of expected MoM fall in the prices of wheat, pulses and fresh vegetables. However, the prices of Chicken, Eggs, Potatoes, Tomatoes and onions are expected to remain on higher side during the month.

Furthermore, lower electricity charges and decline in prices of petrol and diesel further expected to contribute in normalizing inflation numbers.

While many research houses expect inflation figure to settle above 8% on the back of weekly SPI data and other adjustments during the month, BIPL Securities in its inflation preview report has predicted a tumble in November’s inflation to below 8% mark.

This prediction has been made on the back of easing in food inflation due ample supply of wheat after the government addressed the burgeoning crisis in the country by importing the commodity from Russia. This coupled with stable currency over the past few months (appreciates by around 5% FY to date) on the back of robust improvement in Current Account, Government’s insistence of deferring a revision in electricity and gas tariffs amid COVID-19, reduction in administrated fuel prices and high base effect is expected to play significant role in bringing the monthly inflation number down, the report mentioned.

While on the contrary, Shajar Capital stated that despite significant quantity of import of Wheat and Sugar by the Govt. of Pakistan to break cartelization, food index will likely rise by 4.37% MoM mainly due to Chicken, Eggs and Fresh Vegetable prices respectively surged by 20% MoM, 4% MoM and 9% MoM in the month of Nov’20 compared to Oct’20 food prices.

Overall, average prices for 18 out of 51 items forming part of the SPI have increased over the month. Whereas, average prices for 20 items decreased. Prices for 13 items were unchanged.

As per Taurus Securities, the Ministry of Finance also expects headline inflation for Nov’20 to arrive within a range of 7.6%-9.0% owing to the time lag in CPI reaction to monetary stability mainly.

Considering the aforementioned factors,  it can be expected that the average inflation figure to remain below 9% going forward, however, a gradual rise in inflation number can be seen during 2HFY21 which might take FY21 inflation estimate to above 9% against the SBP target of 7%-9%. This may compel the SBP to tighten the monetary policy in 4QFY21.

Arif Habib Limited in its report also highlighted that inflation is expected to remain slightly higher in the range of 7-9% in the FY21 owing to supply side shocks to food prices. There seems little to no threat on inflation from the demand side as aggregate demand still remains subdued thus, negating the fear of over-heating of the economy. The core inflation, on the other hand, has been relatively stable, the report added.

However, any abrupt change in tariffs and removal of subsidies (under discussion post resumption of talks with IMF), exchange rate parity poses an upside risk to inflation expectations.

 Furthermore, recovery in international oil prices following the news on COVID-19’ vaccine, is also expected to increase inflation going forward.

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