January 2, 2022 (MLN): The dark clouds of inflation which have been hovering and banging for a long turned into a perfect storm in the name of flimsy economic recovery as the freshly revealed inflation numbers by the Pakistan Bureau of Statistics (PBS) for December 2021 stayed in line with market expectations.

Safe to say that the prices of essential commodities are rapidly increasing which has pushed Consumer Price Index (CPI) to touch a 22-month high of 12.3% YoY from 11.53% YoY in November 2021 and 8%YoY in December 2020.

This has taken the 1HFY22 average inflation to 9.8%YoY compared to 8.63%YoY from the corresponding period last year. While the average inflation during CY21 was recorded at 12%YoY as against the 9.51% in CY20.

On the flip side, the inflation on monthly basis eased by 0.02% in December 2021, while in the preceding month it has witnessed a notable jump of 3% MoM.

The increasing YoY inflation is primarily attributed to the surge in food, petrol, and energy prices. Despite the fact that the government is taking all the measures to provide relief to the general public, it ends up putting more inflationary pressure at the grassroots level due to messed up and ambiguous policy combinations.

It seems the economy is suffering the consequences which it should have borne at the time of Covid-19 lockdown. Having said that, the people have no way out but to pay more and more on every essential item.

Going into the insights provided by PBS, the food index remained the primary driver of overall inflation with a weight of 35% in the CPI basket. Food inflation during the outgoing month jumped by 10.3% YoY compared to 10.5% in Nov 2021 on the back of supply-side constraints, increasing transportation costs, and elevated food prices in the international market.

Meanwhile, housing, water, and fuel segments weighed CPI by 24%. The index surged by 17% YoY in December 2021 against 15% in Nov 2021 owing to the rise in electricity prices and commodity prices such as steel, cement, etc.

During the period review, the transport segment also moved up by 24% YoY and 1.3% MoM respectively in December 2021 due to higher petroleum prices.

On the other hand, the food index on the monthly basis showed a major drop of 3.4% mainly due to the decline in the prices of vegetables i.e, tomatoes and potatoes, chicken, and sugar. Meanwhile, the liquefied hydrocarbons and motor fuel also staged a dip in prices.

Not to forget, the government had reduced the prices of petroleum products by Rs5 on December 16, 2021, as the price of oil in the international market started cooling down.  

At the same time, core inflation- measured by Non-Food Non-Energy (NFNE) in cities climbed up by 8.3% YoY in December 2021 as compared to an increase of 7.6% in the previous month and 5.6% in December 2020. On monthly basis, urban areas observed a slight increment in the prices by 1.1% in December 2021 as compared to the reported increase of 0.4% in the previous month, and an upsurge of 0.4% in the corresponding month of last year.

Similarly, rural core inflation jumped by 8.9% YoY in the last month of CY21 as compared to an increase of 8.2% in the previous month and 7.7% in December 2020. While on a sequential basis, the prices of NFNE inched up by 1.1% compared to an increase of 1.8% in November 2021, and a surge of 0.5% in the corresponding month of CY20.

The Wholesale Price Index (WPI) swelled by 26.2% YoY in December 2021 as compared to an increase of 27.0% a month earlier and an increase of 5.7% in December 2020. The surging gap between CPI and WPI created an alarming situation which indicates that cost-push inflation will likely hit the remaining months of FY22.

Given the skyrocketing prices, the SBP had revised its inflation outlook in the latest Monetary policy announcement to 9-11% for FY22 from the previous 7-9%, and in order to curb the situation through moderating the growth, it has raised the policy rate by 275 basis points.

Going forward, with average inflation of 9.8% in 1HFY22, expected withdrawal of tax exemptions, increase in energy tariffs and higher Petroleum levy will keep the inflationary pressure elevated.

In its last monetary policy statement, SBP had highlighted “MPC felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved.”

Commenting over this, Umair Nasseer, Analyst at Topline Securities said, “Looking at the inflationary outlook, a further rise in the policy rate by at least 50-100bps cannot be ruled out in 2HFY22.”

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