CPI Review: Inflation outperforms market consensus on lower increase in house rent and urban food indices

November 3, 2020 (MLN): October’s inflation numbers released by Pakistan Bureau of statistics, came as a surprise for many, as many analysts had predicted it to settle beyond 9%, however, after outperforming the market expectations, the headline inflation for the month mentioned above clocked in at 8.9% YoY, compared to 9.04 % YoY in the previous month and 11.04% YoY in October 2019.

On monthly basis, CPI surged by 1.7% MoM compared to the inflation of 1.54% MoM in September 2020. The average inflation for 4MFY21 has declined by 146 bps YoY to 8.87% compared to 10.33% in the corresponding period last year.

The major reason behind deviation is the lower than anticipated increase in house rents, urban food inflation and higher base effect.

The food inflation at national level increased by 3.9% MoM and 16.6% YoY, contributed 3.2% MoM and 14.9% YoY in urban centers and 4.7% MoM and 18.4% YoY in rural centers.

Although the food inflation continues to showcase the biggest surge by reporting a double digit jump in prices on YoY basis in both urban and rural markets, it came better than the expectations in urban centers which is the key factor behind inflation beating market expectations. The major commodities under the food segment that fueled the headline inflation include; Wheat Flour, Meat, Dairy products, Eggs, pulses, vegetables, sugar and Rice whose prices surged respectively by 17.4%, 12%, 11.45%, 45,42% 32.5%, 46%, 34% and 14% YoY compared to prices recorded in October 2019.

Another factor contributing to inflation outperformance is lower than anticipated increase in house rent index that stood at 5.37% YoY and 0.8% MoM in the month of October 2020.

In addition to this, electricity tariffs also came down by 2.3% YoY which further helped in calming overall inflation.

Meanwhile, as per the expectations, transportation index has declined by 1,47% YoY mainly due to decline in international average oil prices by current 33% YoY to USD 41.32 per barrel, in tandem with the appreciation of PKR against dollar by 4.51% YoY to 163.13/ USD in the international market during the month under review compared to Oct’19 prices.

 On the other hand, Core NFNE inflation stood stable at 5.6% YoY in urban region and 7.6%YoY in rural centers, compared to 5.5%YoY and 7.8% YoY respectively in Sep’20.

On the energy front, the government has notified an increase in electricity and gas tariffs which is likely to fuel inflation in coming months. However, the recent sharp decline in prices higher base effect and expected reversal in volatile food prices particularly staple goods on improving demand will keep the upside in check.

Moreover, wheat imports will also keep wheat and related products prices in check.

From a monetary vantage, any resurgence in Covid-19 cases leading to slowdown in economic activities may cause the SBP maintaining its current stance for some more time, however, a possibility of gradual raise in policy rates cannot be ruled if the IMF program is revived once again.

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