February 3, 2020 (MLN): The recent inflation reading for January came as a surprise as it was recorded at 14.6% against 12.6% in December 2019, beating the market expectations of 13.6% by a wide margin, deviating from the average of 11.1% of 1HFY20. On a monthly basis, inflation went up by 2% MoM.
The higher than expected jump in food prices especially in non-perishable items; wheat and sugar as a result of supply shocks, drove the headline reading to accelerate in Jan, though, some stability was shown in perishable items.
It was no surprise to see that other than food index, inflationary pressures remained high due to the key contribution of housing rent, utility group and transport in inflation reading.
In line with the inflationary trends, Urban CPI stood at 13.41% whereas Rural CPI was recorded at 16.34%.
It is prudent to mention that with the new base year 2015-16 CPI readings cannot be compared with old base (2007-08) readings as it is factually wrong. With the old-base, the headline inflation was recorded at 13.1%, which is highest since Jun 2011.
With regards to the inflation outlook, it is uncertain with multiple factors at play which includes the supply of perishable items as opposed to demand pressure, the international crude oil prices, the upcoming increase in gas tariff and fiscal consideration.
Considering the next inflation reading, it is expected that policy rate to remain on hold in 1HCY20 on the basis of stable USD-PKR and correcting oil prices. Though, the headline inflation of January slanted the balance for short term inflation to the upside. The upcoming inflation figure for February will be crucial for setting the expectations for upcoming MPC in March 2020.
