CPI Review: Lower food prices cooled-off December's inflation

January 4, 2021 (MLN): Pakistan’s headline inflation as measured by CPI for the month of December 2020 eased off to 7.97% YoY and 0.68% MoM compared to 8.35% YoY and 0.82% MoM in the previous month.

The key factor for retardation in inflation is the food inflation which saw a dramatic reduction of 3.23% MoM (in particular perishable food items –down by 15.11% MoM) as, during the month, almost all essential items such as onions, pulses, vegetables, tomatoes, potatoes, sugar, wheat, etc. witnessed lower prices. Moreover, the CPI index of non-perishable items also went down by 0.62% MoM.

Another factor that brought a respite in inflation is the lower transportation index (fell by 3.5% YoY) due to motor fuel prices which came off by 9% YoY. However, on monthly basis, the transportation index slightly jumped by 1.63% MoM.

On the flip side, Housing & Utilities index imparted upward pressure on the headline inflation as it rose by 3.5% YoY. Furthermore, Restaurants, Hotels, readymade food, and marriage hall indices also rose to 9-10% YoY, possibly reflecting rising prices post lockdowns.

Outlook:

Cumulatively, during July-Dec FY21, average headline inflation now stands at 8.63% YoY as opposed to 8.67% YoY in the corresponding period last year. As the high base effect is still supporting, CPI inflation is unlikely to exceed the upper limit of SBP’s target of 9% YoY for FY21.

Going forward, the major concerns to overall inflation could be food prices factoring in seasonal demand from Ramadan, increase in power tariff, and any uptick in international oil prices, a report by Arif Habib Limited cited.

Contrary to the above, Next Capital in its report foresees inflationary pressures reaching double digits by the end of FY21, as rising oil prices and the imminent increase in power tariff in order to resume the IMF program will offset receding food inflation.

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