February 27, 2020 (MLN): The January’s inflation figures were a surprise for all as the market went into a tailspin after the issue of CPI figures which contained a hotter than expected rise of 14.6%, prompting a delay in monetary easing.  Following an unexpected jump in January, the headline inflation is likely to slow down in February 2020.

The deceleration in inflation numbers is foreseen on account of decline in prices of food items and delay in energy price hikes.

Since the government has taken several steps to curb food and energy inflation including clamping down on hoarders, withdrawal of regulatory duties on the import of sugar and wheat to address supply-side issues and curtail prices, defer any revision in energy tariffs until FY21 and passing on the impact of easing international crude oil prices and holding of fuel price adjustment in electricity bills. These measures are likely to give some hiatus to monthly inflation.

In the preceding month, the higher than expected jump in food prices especially in non-perishable items; wheat and sugar as a consequence of supply shocks, drove the headline reading to accelerate despite some stability shown in perishable items. In addition, housing rent, utility and transport group were also the main contributor in January’s CPI reading.

Now, as the interest rates have peaked out amid prevailing stability in exchange rates and lower international oil prices, the probability of a further rise in inflation numbers is very minimal. This can also be seen in the table below wherein various research houses have put forth their projections regarding CPI numbers for February 2020. 

What can easily be deduced from the aforementioned projections is that the market unanimously expects a decline in year-on-year (YoY) CPI inflation, as compared to previous month’s YoY inflation of 14.6%. Similarly, on a month-on-month basis, inflation is expected to slow down at an average rate of 0.27% against the MoM rise of 2% in January. Moreover, the above table is also implying to delay in monetary easing as the inflation rate is expected to remain above the discount rate in February 2020 as well.   

The MoM slowdown in inflation numbers is expected on the back of MoM deflation in Food & Non-Alcoholic Beverages Segment due to drop in prices of Wheat, Poultry, Potatoes, Tomatoes & Pulses. However, the impact of fall in prices is likely to alleviate partially by rising prices of Sugar, Garlic, Vegetable Ghee, Cooking Oil, Dairy Products, Rice and Bread. Meanwhile, housing group inflation is expected to fall owing to drop in fertilizer prices coupled with the drop in LPG and cement prices which may support MoM headline inflation to decelerate as compared to the last month.  

With regards to future outlook, the CPI is likely to remain in double digits in the coming months on account of surge in Non-Food Commodity group in particular for items which are commercially imported from China or whose raw materials are sourced from China due to trade disruption, following the outbreak of Coronavirus, a report by Taurus Securities highlighted.

In addition to this, the advent of Ramazan is also expected to bring a new ripple of inflationary pressure which may keep the CPI figures elevated.

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