CPI Review: Inflation to ease further on high base effect

June 2, 2020 (MLN): Pakistan’s year-on-year headline inflation eased to 8.22% in May’20 from 8.53% in the previous month, largely in-line with market expectations.

This is despite a 0.32% increase in monthly inflation in May’20 against the decline of 0.8% in April’20, bringing the 11MFY20 average inflation to 10.94% YoY against 6.69% YoY during 11MFY19, the latest inflation data released by Pakistan Bureau of Pakistan (PBS) indicates.

The monthly increase in CPI reading was a result of a 1.6% increase in food prices and a 1.4% rise in clothing & footwear index backed by Ramadan and Pre-Eid shopping increased demand. Within the food group, the prices of chicken, potatoes, fruits and milk, surged by 41%, 31%, 10% and 5% on a month-on-month basis respectively, contributing heavily to an increase in MoM inflation.

However, the substantial decline in the transportation group by 6.5% MoM contributed to soften the inflation reading as domestic POL product prices continue to tailspin. Interestingly, the higher food prices outweighed the benefit from a reduction in transportation index, as per research note by Ismail Iqbal Securities.

During the period under review, Housing rent, Water, Electricity, Gas & other group which weighs 23.6% in CPI shrank by 0.1% MoM, mainly on an account of a 6% reduction in prices of Liquefied Hydrocarbons i.e. Kerosene oil.

On a year-on-year basis, the groups which led the inflationary pressure include Food, Alcoholic Beverages, Clothing and Footwear and Miscellaneous.

Going forward, market analysts see inflation to maintain a downward trajectory due to further reduction in fuel prices by 7.06 per litre along with muted demand due to the COVID-19 pandemic.   

According to the research by Arif Habib, the inflationary pressure would ease in the coming months as Ramadan has concluded which could lead to a reversal in food prices which rose in the Holy month.

However, the uptick in food inflation can not be ruled out due to expected locust attacks in the coming months, which might result in supply shocks. Food prices and budgetary measures would determine the path of inflation, revealed the research of Ismail Iqbal.

Moreover, it is expected that FY20 average inflation will likely settle to a single digit due to a high base effect.

Keeping the current inflation trajectory into consideration, market analyst of Pearl Securities foresees monetary easing will continue and more rate cuts would be expected from SBP in 1HFY21.

Copyright Mettis Link News