June 2, 2021 (MLN): National CPI eased off at 10.87% YoY in May’21 compared to 11.1%YoY reported in April’21, taking the 11MFY21 average inflation to 8.83% YoY compared to 10.9% in 11MFY20.
On monthly basis, CPI moved up by 0.1% primarily due to surging prices of food and clothes. However, a reduction in electricity prices on account of fuel adjustment set off inflationary pressure created by food prices to some extent.
On the back of Ramadan seasonality and supply bottleneck amid Covid related restrictions, Food and Non-alcoholic Beverages Index (weight in CPI 34.6%) contributed most to inflation with an increase of 0.67% MoM (impact of 0.24% MoM) due to an uptick in prices of Chicken, Fruits, Wheat flour, Sugar, Cooking oil and Mustard Oil.
On the other hand, a decline of 1.2% MoM in the Housing group diffused some inflationary pressure due to a 5.6% MoM downward revision in energy price adjustment and a 9% decline in LPG prices. Government’s decision to delay the hike in petroleum prices also deflated some pressure in May’s readings.
On yearly basis, the rise in NCPI was mainly the result of a rise in Food Index, Clothing & Footwear Index, Housing & Electricity index, Transportation index and Restaurant & Hoteling index surged drastically by around 15%YoY, 10.6%YoY, 8.4%YoY, 14%YoY, 8.6%YoY respectively in May’21 compared to May’20 indices levels on the back of increasing demand after the gradual lifting of lockdown restrictions amid Covid-19 pandemic.
Categorically, the inflation in urban areas clocked in at 10.8% YoY whereas rural inflation stood at 10.9% YoY.
At the same time, core inflation- measured by non-food, non-energy (NFNE) remained relatively stable and locked in at 7.10% YoY, compared to the 7.3% YoY in April’21. Urban core inflation during May’21, jumped by 6.8% YoY as compared to an increase of 7% in the previous month and 6.3% in May’20. Rural, on the other hand, grew by 7.6% YoY in May’21 as compared to an increase of 7.7% in the previous month and 8.4% in May’20. On the monthly basis, Urban and Rural NFNE inched up by 0.2% and 0.3%, respectively.
Going forward, for the FY21, the CPI inflation is expected to hover slightly above the expected range (7-9%) of the State Bank of Pakistan as supply-side imbalances, increasing food prices, international oil prices, and lower base effect would keep inflation elevated. However, if the energy tariffs remain stable, analysts expect inflation would return to single digits from Jul-21.
On the monetary policy front, MPC, in its latest meeting decided to keep the policy rate unchanged at 7% for the next two months. The committee also guided that the monetary policy would remain accommodative in the near term.
“Next MPS is due in July; and there is a high probability that the central bank will not change interest rates, insofar as the global pandemic situation and present inflation outlook remains the same (few demand-led factors). However, if the FY22 Budget turns out overall expansionary, the SBP can consider increasing rates in July,” Muhammad Saad Ali, Head of Research at Intermarket Securities said.
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