Inflation in Pakistan: CPI of 5.7% in January is the lowest level in two years

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National CPI decelerated sharply to 5.7% yoy in January 2021 vs. 8.0% yoy in December 2020 (down 0.2% mom). Urban CPI fell to 5.0% vs 7.0% yoy in the previous month, while Rural CPI clocked in at 6.6% vs 9.5% in December 2020 (down 0.3% mom). The deceleration in CPI is largely due to a low-base effect (January 2020 CPI of 14.6%) and receding Food inflation (down c.2.2% mom).

Core inflation, however, exhibited greater stability. Urban Core inflation is 5.4% in January vs. 5.6% in December (up 0.9% mom). Rural Core inflation, on the other hand, rose to 7.8% vs 7.7% in the previous month (up 1.1% mom). It is noteworthy that core inflation has remained steady around 5.5%/7.6% (for the urban/rural indices) since July 2020, despite a c.7% yoy pickup in the LSM during July-November period (no signs of the economy overheating, as stated by the SBP in the recent monetary policy).

Urban/Rural Food inflation of 7.3%/7.2% in January, is at the lowest level they have been since July 2019. This was possible because (i) the government addressed recent supply issues in wheat and sugar through imports, and (ii) major perishable items are down c.20% yoy. However, a deeper look is more telling. We highlight that 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. Therefore, we think Food inflation can rebound in the coming months.

Meanwhile, the Housing & Utilities index rose only 3.4% yoy, led by the increase in House Rent index. Transport index is down 2.6% yoy due to lower Petrol prices.

The headline inflation readings may not sustain the sub-7% level in the coming months (despite the low-base effect), because the impending power tariff hike of 15% is likely to push the CPI higher, in our view. We continue to expect CPI readings to average 8-9% in the remainder of 2021.

Reported by Intermarket Securities Limited

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