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Preview: Headline inflation may cross 23% in July

Preview: Headline inflation may cross 23% in July
Preview: Headline inflation may cross 23% in July
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July 31, 2022 (MLN): The consumer price index (CPI) is due on Monday. Market participants are seeing July as another month of high inflation after June as they expect headline inflation for the month to stand between 22%-25.2% with an average estimate of 23.34% YoY, mainly on the back of higher food and petroleum product prices, fuel price adjustment in electricity prices, quarterly revision of housing index and the lagged effects of sharp Rupee depreciation of 14.4% in the month of July.

On a sequential basis, market is expecting the inflation rate to hover between 2.1%-4.6% with an average estimate of 3.16%, with a major contribution likely to come from the transportation index on the back of revision in various transport fares, the surge in the housing index which comes as a result of quarterly rent adjustments & spike in energy tariffs and jump in the food basket.

Last month, headline inflation surpassed the market expectation and touched a 13-year high of 21.3% YoY, taking a serious toll on consumers’ real income.

Ministry of Finance in its monthly economic outlook also forecasted July’s YoY inflation to stay around the level observed in June’22 due to the increase in international commodity prices particularly energy prices and the depreciation of PKR.

During the month of July, petrol and diesel prices increased by 30% and 44% MoM as the government started charging petroleum levy and fully removed subsidy. However, in the mid of July, to pass on a decline in global prices to inflation-hit consumers, the government announced a reduction in fuel prices whose impact is expected to be reflected in next month’s readings.

The surge in July’s inflation numbers will be accredited to an increase in the food index mainly due to hoarding by manipulators, short supply on delay in import LCs, higher transportation costs, and PKR depreciation. As per the SPI data, in the food segment, increase was observed in tomato, wheat flour, eggs, cooking oil and pulse gram prices.

Housing index also likely to increase as electricity tariff increased during the month due to higher fuel charges adjustment.

Furthermore, transportation index also expected to stay elevated on the back of drastic rise in fuel prices on IMF demand. In addition, increase in transport fares and revision in motor vehicle taxes will also keep the transport sector index uplifted.

Meanwhile, core inflation (non-food, non-energy) is also likely to take a jump in the month of July on the back of higher furnishing and household equipment, clothing and footwear, recreation and culture, and other components.

CPI Projections for July 2022

YOY (%)

MOM (%)

AL Habib Capital Markets

23.4

3.0

Taurus Securities

22.5

2.3

Spectrum Securities

24.5

4.0

Arif Habib Limited

24.0

3.5

Darson Securities

22.2

2.1

Next Capital

24.2

3.7

Insight Securities

22.4

2.3

Abbasi and Co.

24.4

3.9

Sherman Securities

23.5

3.1

JS Global

22.3

2.2

Adam Securities

22.0

4.0

AKD Securities

23.1

2.8

Foundation Securities

23.0

2.7

Ismail Iqbal Securities

25.2

4.6

Range

25.2 – 22

4.6 – 2.1

Mode

N/A

2.30

Median

23.25

3.05

Average

23.34

3.16

Inflation and monetary policy

Although global commodity prices have started to ease off from their peak levels, market participants believe that a higher inflationary trend will continue in the coming months due to a possible increase in electricity and gas tariffs which is a pre-condition to securing the IMF program, imposition of petroleum levy and sales tax on petroleum products. This along with significant Pak rupee devaluation and likely spillover effects may dilute the impact of the reduction in commodities to some extent.

 To recall, as a result of the multi-year high inflation reading in June, SBP had increased the policy rate by 125 bps to 15% in its last MPC meeting on July 7.

With inflation expectations remain elevated in near future, SBP will likely be compelled to increase the policy rate even further in the next MPC meeting.

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Posted on: 2022-07-31T13:53:34+05:00

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