CPI Review: Persistently high inflation turnout to trigger a rate hike

October 5, 2020 (MLN): Leaving the market expectations behind, the headline inflation for the month of September 2020 surged by 9.04% YoY and 1.54% MoM compared to 0.6%MoM and 8.2% YoY of the previous month and 0.8% MoM and 11.4% YoY of September 2019.

The higher prices of perishable food items which augmented by 16.5% MoM and 15.1% YoY was the main reason behind higher than expected inflation numbers for September’20. In particular, perishable food items like Fresh vegetables including Tomatoes, Potatoes and Onions registered a significant increase in prices, in both Urban and Rural areas.

Already the SBP in its recent MPC meeting indicated that spike in food prices due to supply side shocks has increased inflation forecast and may build inflationary pressures going forward.

While Core inflation (Non-Food, Non-Energy) remained stable at 5.5% YoY for urban and 7.8% YoY for rural centers compared to 5.6% YoY and 7.6% YoY during the previous month, respectively.

Further pressure on headline inflation came from Health Group and Household / Furnishing Group which continue to put burden on pocket as both groups recorded inflation of 0.97% and 1.11% MoM respectively. Although the weights of the same in CPI basket is not significant, however, the trend in index of clinic/consultation fee (+3.28% MoM), medical tests (+1.55% MoM) and soaps, detergents and other sanitization items (+1.60% MoM) is noticeable, said a report by Aba Ali Habib Securities.

In addition to that, Housing and Transportation indices also rushed by 7.50% YoY and 7.89% YoY respectively in the month of Sept’20 compared to Sept’9 indices.

With regards to average inflation, which stood at 8.85% during 3MFY21, was within the range of SBP’s forecast of 7-9%, also SBP indicated that average CPI during FY21 is no longer expected to turn out around the lower-bound of its projected range. However, Intermarket Securities in its report underlined that SBP hinted that persistently high inflation turnout (9% or more), in concert with strong demand trends and high financial stability, will trigger a rate hike.

Still, there are possibilities that in coming months inflation will normalize below 9% as the government will be able to tame wheat prices, the report added. Moreover, some respite may arrive for the month of Oct’20 due to the recent Rs 2.4 per litre cut in diesel prices by the Government.

Contrary to the above, Aba Ali Habib Securities is of the view that inflation will remain elevated in near future due to recent hike in gas tariffs and HSD prices, furthermore, uptick in food inflation due to supply shocks continues to pose the risk.

On the similar note, Shajar Capital expects the inflation to remain on higher side in FY21, despite lower petroleum and crude oil prices, as the food and housing inflation will likely to continue upward trajectory in 2QFY21. Additionally, hike in electricity prices along with rise in gas prices by the ECC will also likely increase chances of higher inflationary pressures in the 2QFY21.

On the macro economic front, depressing USDPKR parity along with the improving demand for imports will also hurt the currency parity in the 2QFY21, which may resultantly increase chances of higher 2QFY21 average inflation. With regards to the monetary policy, the report added that if the higher inflation scenario continues to persist in 2QFY21, the reversal in quantitative easing in Pakistan can be witnessed from November’20.  

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