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March Inflation: What market expects

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March 30, 2022 (MLN): Driven by the supply constraints in the strong demand environment, food inflation will continue to propel March’s headline inflation despite incorporating the PM relief package.

With the continued pattern of recording double digits in the preceding four months, the consumer price index (CPI) is expected to increase to 12.58% in March’22. While the monthly rate is anticipated to hover around 0.67%. However, the CPI outturn for March would have been higher than the market estimate if the relief package had not been announced in the form of subsidies.

This would bring 9MFY22 average inflation to 10.73% as against 8.4% YoY in the corresponding period last year. Remember that the State Bank of Pakistan’s inflation forecast is 9%-11% for the ongoing fiscal year.

In February 2022, CPI came in a fair bit weaker than January’s 13%, clocking in at 12.24% YoY, thanks to a slowdown in energy price inflation. While in March 2021, it stood at 9.1%.

In the Economic Outlook for March 2022, the Ministry of Finance highlighted that inflation remains under pressure. The government is taking possible measures to contain the current pass-through of this increase into domestic consumer prices, especially through relief packages. Still, YoY inflation is expected to remain within the 9.5% to 11.5% range.

The food index remains a concern. This is important because it represents a big chunk of what people spend money on. On a sequential basis, pursuant to the justifications provided by these research houses, headline inflation is expected to flare up again due to the food index, which is set to gain momentum on the back of the increase in the prices of chicken, fresh fruits, onion, vegetables ghee and cooking oil.

Notably, the skyrocketing prices of chicken will contribute to the higher food index as an outbreak of Lumpy Skin Disease (LSD) infected cattle across Sindh.

Also, this elevated food inflation tracks the international commodity cycle that reflects in edible oil coupled with currency depreciation, keeping CPI on a higher side.

The other key indices, clothing, and footwear will keep inflation elevated on a sequential basis.

On the other hand, some respite is likely to come from the transportation index and housing index on the back of a reduction in electricity charges and lower domestic petroleum prices as the government capped their prices despite a 23% MoM increase in international crude oil prices.

Meanwhile, the year-on-year uptick in CPI will likely be led by an increase in transport, restaurants & hotels, food, household equipment, health miscellaneous, and housing by 23% YoY, 15.7% YoY, 14.8% YoY, 13.6% YoY, 11.3% YoY, 10.5% YoY and 9.3% YoY, respectively.

CPI Projections for March 2022

YoY

MoM

Foundation Securities

11.90

0.10

Spectrum Securities

12.56

0.64

Abbasi and Company

12.25

0.50

Arif Habib Limited

12.38

0.49

Adam Securities

12.40

0.50

Sherman Securities

12.70

0.70

JS Global

13.18

1.20

Insight Securities

12.31

0.42

Intermarket Securities

13.10

1.10

Range

12.25-13.18

0.49-1.2

Mode

0.50

Median

12.48

0.57

Average

12.58

0.67

Expected Average Inflation in 9MFY22

10.73%

It is expected that average inflation would remain elevated in the coming months owing to the ongoing super commodity cycle, seasonal factors such as Ramadan & Eid effect, and partly low base effect. Beyond October 2022, however, CPI is expected to revert to single digits, partly because a high-base effect will kick in.

SBP Governor Dr. Reza Baqir made his intentions clear during March’s MPS if global commodity prices worsen given the Russia-Ukraine conflict, posing challenges to the outlook for the current account deficit (CAD) and inflation expectations, it will adjust the monetary policy from the present status quo stance.

However, the inflation outlook for FY23 remains relatively soft. Global commodity prices have recently corrected somewhat, and February CAD was an encouraging $0.5bn (down 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 April MPS, Intermarket Securities said.

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Posted on: 2022-03-30T14:26:00+05:00

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