CPI Review: A whiff of inflation in FY21?

July 02, 2020 (MLN): In June 2020, Pakistan’s cost of living, based on Consumer Price Index (CPI), rose to 8.59% in the annual terms compared to 8.22% YoY in May’20 and 8% in June’19 respectively, in line with the market expectations, released by Pakistan Bureau of Statistics (PBS)

This takes the FY20 National CPI average to 10.74% vs 6.80% in FY19.

The month of June saw easiness of lockdown measures which led to the reopening of businesses, resulting in an increase in demand for goods and services.

This increase in inflation was primarily attributed to the Food Index which increased by 2.1% MoM, wherein the major commodities which witnessed an increase in prices include wheat, eggs, tomatoes, vegetables, and spices.

On the other hand, a reduction in energy prices by Rs 7 per liter, and a decline in perishable food items pushed headline inflation lower.

However, the upsurge in the food index outweighed the benefit from a 1.1% drop in the transport index. Moreover, the rise in transport services by 7.5% MoM also diluted the impact of lower petroleum prices, as per research note by Ismail Iqbal Securities.

Apart from transportation index, Housing rent, Water, Electricity, Gas & other fuels which weighs 23.63% in CPI also kept the inflation restrained in June as it shrank by 0.16% MoM, mainly on an account of a 5.46% reduction in prices of Liquefied Hydrocarbons i.e. Kerosene oil.

In FY20, the major contributor to increase in annual inflation rate was the cost of food whereas the transportation index provided huge support in suppressing the inflation numbers on the back of lower oil prices.

Going forward, market analysts see that inflationary pressure will increase in the upcoming month due to several reasons which include; hike in gas & petrol prices, demand and supply pressure on major food commodities especially the shocks due to locust attacks and quarterly review of house rent index.

The recent depreciation of PKR along with an increase in international oil price, and expected hike in gas and electricity tariffs would uplift the inflation in FY21. The government has projected 6.5% inflation in FY21 while the SBP has forecasted the inflation would remain in the range of 7-9% during FY21, another report by Aba Ali Habib revealed.

Keeping the current inflation trajectory into consideration, the research by Pearl Securities highlighted that State Bank of Pakistan believes that the benefit of keeping a positive real interest rate is not worth at this point as their prime focus is on higher GDP growth rate and employment level. There is the possibility that interest rates are near to bottoming-out, however, the report argued that there is still a little elbow room in 1HFY21 for SBP to ease policy rate by another 100 bps.

However, according to Ismail Iqbal’s research note, interest rates would remain stable in the near term.  

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Posted on: 2020-07-02T15:15:00+05:00