National CPI inched lower to 8.2% yoy for May 2020 vs. 8.5% yoy in April. Urban CPI decelerated to 7.3% yoy vs. 7.7% in April while Rural CPI remained sticky at 9.7% yoy vs. 9.8% yoy in April. This takes the 11mth National CPI average to 11.0%.

Both Urban and Rural Core inflation crept lower to 5.4% yoy and 6.4% yoy (vs. 6.2% yoy and 7.4% yoy respectively in the previous month).

Sharp rise in potato, pulses and wheat product prices was countered by decline in prices for tomato, onions and other fresh vegetables. Urban food inflation therefore remained largely stable at 10.6% yoy (vs. 10.4% yoy in April). Rural food inflation rose to 13.7% yoy (vs. 12.9% yoy).

Other reasons for the soft CPI readings are: (i) base effect in other major heads, (ii) yoy decline in petrol and LNG prices dragging down the Transport index (Urban/Rural: down 9% yoy and down 7% yoy). Inflation in Housing & Utilities and Education indices was modest at 6.5% and 1.9% yoy respectively for Urban.

Inflation in FY21 is expected to average towards the lower-end of the indicated range of 7-9%. Disinflation is likely to remain entrenched, particularly after reduction in petroleum prices for June amid global headwinds (petrol and diesel prices reduced 4-5% previously in March). That said, early onset of locust swarm attacks suggest a spike in essential crop prices in Sindh and Punjab may occur in future.

SBP has reduced the Policy Rate by 525bps so far in CY20 to 8.0% to counter the expected negative economic impact of the Covid-19 pandemic. In the event inflation remains sticky at 8%+, the upcoming Monetary Policy may see the central bank holding off on further cuts for now. Note that National CPI has averaged 11.0% in the July-May period (within the SBP projected range of 11-12%), where real interest rates are now nearly zero. The SBP forecasts CPI to average in the 7-9% range in FY21. (Intermarket Securities Limited).