CPI Review: No respite from inflation for FY21

May 4, 2021 (MLN): The inflation is raising its ugly head once again, as CPI inflation scaled up to a 14-month high of 11.1% YoY in April’21 vs.  9.1% YoY in March’21, taking the 10MFY21average inflation to 8.6%YoY compared to 11.24% in 10MFY20.

The double-digit inflation was expected in April’21 due to a low base in the same month a year ago as April’20 was under an economic lockdown.

On monthly basis, CPI increased by 1.03% during the month mainly on the back of a 2.18% surge in food inflation. The soar in food inflation was liable to happen given the historical trend where food prices surge ahead of and during Ramadan, and this time, items such as fresh fruits, vegetables, and chicken caused a hike in the overall inflationary trend.

The trend in core inflation showed moderation on a YoY and MoM basis from the previous month. The urban core inflation measured by non-food, non-energy (NFNE) during Apr’21, jumped by7.0% YoY as compared to an increase of 6.3% in the previous month and 6.4% in Apr’20. Rural, on the other hand, grew by 7.7% YoY in April’21 as compared to an increase of 7.3% in the previous month and 6.7% in Apr’20. On the monthly basis, Urban and Rural NFNE escalated by 0.9% and 0.7%, respectively.

Besides food inflation, another major index within the CPI basket that exhibited a sharp MoM rise was Clothing. This was too affected by the ongoing Ramadan and the coming Eid holidays. Among other major heads, the Housing Index posted a MoM jump of 0.51% on account of quarterly house rent adjustment. However, the transport index fell by 1.2% MoM (up by 6.5% YoY) because of a 2% MoM decline in Petrol prices while the Education index remained the slowest; ever since the onset of Covid-19, it has risen by 1.2% YoY on average vs. 6-7% YoY pre-pandemic.

Going forward, in the remainder of the fiscal year, the CPI inflation is expected to remain on a higher side as supply-side imbalances, with an increase in electricity and lower base effect, would keep inflation elevated. As per the analysts, the current inflation trajectory indicates that double-digit CPI may continue in the remaining months of 4QFY21 due to the low base effect.

On the other hand, low international oil prices and PKR remaining strong against the greenback will help keep inflation in check.

SBP, in its latest guidance, highlighted that despite supply-side pressures, overall inflation expectations remain well-anchored, particularly on the aggregate demand side. Even if we assume 11% inflation in the remaining two months of the fiscal year, CPI would ultimately average around 9% for the year. Hence, the SBP is likely to maintain the status quo in the upcoming monetary policy announcement, given the intensified 3rd pandemic wave and recent discussion on the possibility of a broader lockdown.

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Posted on: 2021-05-04T09:02:00+05:00