CPI: Spiking food costs, the main factor driving inflation

April 4, 2022 (MLN): Elevated food inflation following higher international food prices amid supply chain disruptions, led the CPI general inflation for March’22 to clock in at 12.7%YoY from 12.2% YoY last month, making it the fourth consecutive monthly CPI reading of over 12%.

Accordingly, headline inflation during 9MFY22 has risen to 10.7%YoY.

On a month-on-month basis, inflation soared by 0.79% as compared to 1.2% MoM in February 2022, with the major impetus to the uptick in monthly prices coming from Food and Education index. Food inflation has jumped by 2.5% MoM, mainly due to elevated prices of chicken, cooking oil prices and other perishable items. On the other hand, the Education index increased by 4.7% MoM in March.

On the flip side, a notable decrease was observed in the housing index which fell by 2.25% MoM mainly due to a 13% MoM reduction in the electricity charges on account of government subsidy on electricity tariffs. Meanwhile, fuel prices also recorded a decline of 2% MoM as Prime Minister Imran Khan announced Rs10/litre reduction in petrol and diesel prices and Rs5/unit cut in electricity tariff at the start of Mar’22, and pledged not to increase these prices until the next budget.

Region-wise, Urban CPI witnessed an increase of 0.7 MoM and 11.9% YoY in March while Rural CPI soared by 1 MoM and 13.9% YoY during the said month.

Core inflation grew by over 1% MoM in March compared to an increase of less than 1% in the previous month. Similarly, Urban core inflation in March jumped by 1.2% MoM and 8.9% YoY while Rural core inflation has swelled to 1.15 MoM and 10.3% YoY in March.

In the month of April, inflationary burdens are expected to persist due to the Ramadan effect and quarterly house rent adjustment. Beyond that, elevated food prices amid supply chain distortions coupled with sharp Rupee depreciation over the last 9 months would keep FY22 inflation on the higher side.

However, the government’s decision to absorb higher international oil prices and freeze electricity tariffs till the end of FY22 would be counterbalancing, Zeeshan Azhar, analyst at Foundation Securities said.

On the monetary policy front, the SBP in its last MPS guided that if global commodity prices worsen, they may call an emergency meeting and will adjust the
monetary policy from the present status-quo stance. But, they guided that the inflation outlook for FY23 remains relatively soft.

On a positive front, global commodity prices have recently corrected somewhat, and February CAD was an encouraging $0.5bn (down by 78% mom). On the other hand, fixed income rates have risen 115bps in the auctions following the last MPS. All in all, there is a possibility of a 50bps increase in the policy rate in the April MPS, Muhammad Saad Ali, analyst at Intermarket Securities said.

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Posted on: 2022-04-04T21:32:55+05:00

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