CPI Review: Upward trajectory to begin in a month or two

February 2, 2021 (MLN): The first month of CY21, witnessed an appreciable deceleration in consumer product prices as headline inflation eased to 5.65% from 14.56% in January 2020, dipping below 6% for the first time in two-year largely due to high base effect and receding food prices on the back of smooth supplies of perishable food items.

On monthly basis, CPI inflation declined by 0.21% as compared to 0.68% in December 2020. Interestingly, the decline in January’s inflation was more pronounced in Rural (down by 0.29% MoM) which had been continuously trending higher in previous months, compared to Urban (down by 0.16% MoM).

This takes average inflation during 7MFY21 to 8.2%YoY compared to 11.6% in 7MFY20. While Urban and Rural CPI during the same period clocked in at 6.98% YoY and 10.02% YoY respectively.

The lowest CPI numbers in 24 months were largely driven by a peak inflation level in the same month a year ago due to disruption of the food supply chain, which caused a massive increase in prices of almost all perishable food items. As the government has addressed recent supply issues-particularly in wheat and sugar through imports (as food imports up by 51% YoY in 1HFY21), the prices of major perishable items witnessed a fall. As a result of improvement in supply dynamics and a slight fall in prices of essential kitchen items, inflation has been on a downward trajectory since September. However, the prices of some food items are still on an upward trajectory. Nevertheless, CPI and core inflation slumped to their lowest at 5.7% and 5.4% in January in more than two years, indicating that prices now seem to be stabilizing. Key items in the food basket that recorded declines during January were chicken, eggs, various vegetables, and spices.

Meanwhile, it is important to note that inflation rates were in double digits during Feb-Mar 2020, this suggests that inflation will remain on the lower side for the next couple of months, however, when the impact of the high base effect subsides, the inflation trajectory is expected to become steeper.

Furthermore, food inflation which showed a considerable deceleration in the January inflation rate (dipped by 2.65% MoM) is expected to rebound in coming months, as prices have been stabilized due to imports. To highlight, a lot of major food items including wheat, sugar, and those affected by imported food prices such as pulses and cooking oil, are still exhibiting double-digit YoY growth rates, a report by Intermarket Securities highlighted. This indicates that the present trend is short-lived, and the headline inflation is likely to begin its upward flight in a month or two.

Moreover, in the latest development, Dairy farmers in the metropolitan on their own announced Rs 20 per litre rise in milk prices which has yet to be responded by official authorities. This could also have a significant impact on CPI if sustained, as it has one of the highest weightage in the food basket.

On the utility front, increasing utility rates are also expected to keep inflation elevated as the Oil and Gas Regulatory Authority (Ogra) notified an Rs10.37 per kilogram increase in the price of Liquefied Petroleum Gas (LPG) for the month of February.

In addition, the impending power tariff hike of 15%, rising petroleum prices, and an uptick in international oil prices are also likely to push the CPI higher. However, with the base effect still supporting, CPI inflation is unlikely to exceed the upper limit of SBP’s target of 9% YoY in coming months.

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