CPI review: More tightening to curb inflation?

December 1, 2021 (MLN): Pakistan’s inflation across a wide swath of purchased items by consumers every day was even worse than expected in November 2021, surging at the fastest annual pace in twenty months as the food prices hiked phenomenally coupled with an upsurge in fuel costs while housing group moved higher.  

The consumer price index (CPI), a basket of products ranging from petrol and restaurants & hotels to groceries and electricity tariffs, soared by 11.53% YoY, the highest since May 2021 when the CPI annual rate was 10.9%. While the market expected consumer inflation to touch a double-digit figure of 10.19% YoY for November.

With this, the average inflation for 5MFY22 arrived at 9.29% YoY against the average of 8.76% YoY in the same period last year, exceeding the upper band of SBP’s inflation forecast of 7-9% YoY for the ongoing fiscal year.

On region-wise, CPI inflation urban heightened by 12.0% YoY whereas rural jumped by 10.9% YoY in November 2021 as compared to 9.6% YoY and 8.7% YoY (respectively) during the same month last year.

The steep climb in the cost of living was blamed on a 10.47% YoY increase in food prices due to its highest weightage of 34% in the inflation basket. Besides food inflation, another major index within the CPI basket that exhibited a sharp 24.4% YoY rise was the transport housing & electricity index, followed by housing with 14.8% YoY.

On a sequential basis, the major contributors to inflation in the departed month were the food index, housing and cost of transportation, adding 1.44, 0.55 and 0.39, percentage points, respectively to CPI Index. Within the food category, the perishable food index recorded a 14.8% MoM increase with items such as tomatoes, potatoes, cooking oil and fresh vegetables contributing the most to the monthly food inflation. Also, the non-perishable food index too witnessed a jump during the month, up by 2.14% MoM.

Fuel prices again were a big contributor, pushing up the transport index by 6.31% MoM on account of higher international oil prices. This continuous rise in energy prices indicates more reasons for concern that soaring inflation could be a major worry what policymakers anticipate.

Meanwhile, core inflation, stripping out food and energy prices, scaled up to a 28-month high of 1.4% in the said month under review.

Going forward, inflation is likely to keep getting worse over the coming months due to supply-side disruption while demand is expected to stay robust that might push the rate of inflation higher. That is undoubtedly going to put pressure on SBP to increase further policy rates.

“The next 7MFY22 average could be in the range of 11-12%, with a peak over 13%. For December 2021, food inflation is likely to ease due to seasonal factors, however, a large electricity fuel price adjustment is expected in Dec (PKR4.75 per unit), which would keep inflation on the higher side”, said Fahad Rauf, Head of research at Ismail Iqbal securities.

Falling commodity prices are a positive sign; however, sustainability is questionable. Thus, secondary market yields might further adjust upwards tomorrow, considering the inflation surprise. We expect a 75bps increase in December 2021 policy, he added.

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