Pakistan’s CPI Inflation in Jul 2023 came down to 28.3% YoY vs. 29.4% YoY in Jun 2023 and 38.0% YoY in May 2023. This came higher than market expectations of 26-27%.

On MoM basis, CPI inflation was up 3.5% in Jul 2023 as compared to decline of 0.3% in Jun 2023 and last 6 month average of 2.4%.

The higher inflation is mainly on account of (1) higher than expected increase in electricity charges, which rose 40% MoM compared to expectations of 27% MoM, and (2) higher than expected food inflation.

We believe the difference in electricity price increase is due to variations in slab weights.

Core inflation (NFNE) in Urban areas increased by 1.2% MoM (+18.4% YoY) in Jul 2023 as compared to 0.7% MoM (+18.5% YoY) in Jun 2023. Similarly Core inflation in Rural areas was increase to 1.2% MoM (+24.6% YoY) in Jul 2023 as compared to 0.9% MoM (+25.2% YoY) in Jun 2023.

Food prices that have increased on MoM basis includes Fresh Vegetables (+37.64% MoM), Tomatoes (+33.45% MoM), Condiments and Spices (+18.80% MoM), Wheat Flour (+13.36% MoM), and Sugar (+11.84% MoM) among others.

Food inflation in Jul 2023 also rose by 39.54% YoY. Higher food inflation was driven by up tick in prices of Wheat Flour (+102% YoY), Tea (+97% YoY), Rice (up 69% YoY), Wheat (+67% YoY), Potatoes (+61% YoY), and Chicken (+58% YoY).

Housing, Water & Electricity which contributes around 24% to the CPI, rose by 10.84% YoY and 8.04% MoM in Jul 2023. Transport index mainly comprises of Fuel prices down by 0.23% MoM in Jul 2023 while up 12.60% YoY.

We anticipate monthly CPI inflation to soften and gradually decline over the next 12 months. This is due to base effect along with tight monetary and fiscal policy.

We expect inflation for FY24 to average at around 21% in line with Government estimates.

Courtesy- Topline Securities