March 2, 2021 (MLN): The headline inflation for the month of February 2021 climbed to a four-month high of 8.7% YoY from 5.65% YoY in the previous month due to a jump in the prices of food and energy. This was the sharpest increase in a month. While in the same month last year, the figure stood at 12.4% YoY.

On a month-on-month basis, it inched up by 1.8% as compared to a decrease of 0.2% in the previous month and a decrease of 1.0% in February 2020.

The average inflation rate for the seven months of the current financial year was registered at 8.25% YoY compared to 11.7% in the corresponding period last year.

The upsurge in the cost of living on a yearly basis came mainly due to an increase in food prices, the Housing index, Clothing index, and Restaurants & Hotels index which went up by 9.7%, 10.6%, 11.3%, and 8% YoY respectively.

Whereas, on a MoM basis, the spike in inflation was led by the Housing, Water, etc. index which was up by 4.4% MoM up on the back of a 29.5% MoM hike in electricity tariffs. In addition to this, the transport index also contributed to an increase in MoM inflation as it soared by 1.9% on the back of a 2.6% MoM rise in fuel prices.

However, contrary to the expectations, food inflation showed a stable trend on monthly basis as 35% MoM and 9% MoM rise in chicken and cooking oil prices was set-off by 58% MoM, 15% MoM, and 8% MoM decline in Tomatoes, Potatoes, and Onion prices.

Prices for consumer items like garments, hosiery, and footwear also increased significantly, which can be attributed to rising domestic fuel prices in part. Elsewhere, prices for tools and equipment also saw an increase, which can be attributed to an uptick in construction activity across the country, a report by Taurus securities said.

With regards to Core inflation, which is calculated by excluding food and energy items remained moderate. Urban core inflation is 6.4% in February against 5.4% in January, up by 1.1% MoM. Rural core inflation, on the other hand, fell to 7.7%  as opposed to 7.8% in the previous month, depicting a growth of  0.5% MoM. Cumulatively, during July-February 2021, Urban and Rural core inflation have averaged 5.6% and 7.7%, respectively.

Although the jump in February’s inflation figure was higher than expected, it remained in line with the central bank's forecast range and would not spur immediate policy reaction.

Meanwhile, it is important to note that this 8.7% inflation rate was substantially higher than the forecast of the Ministry of Finance also, that expected inflation to remain in a range of 5.5% to 7.5% in February’21.

This uptrend in general price level is expected to continue in the coming months with the onset of Ramadan soon. Moreover, a further increase in electricity tariffs and any uptick in international oil prices are the major concerns to overall inflation. To highlight, petrol price changes have recently been held back by the government and a potentially big change in the future will push CPI higher.

Besides, SBP is expected to meet by the end of this month to announce Monetary Policy for the next two months wherein, it is expected that SBP will keep the policy rate unchanged at 7% as it sees no risk to its inflation target.

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