National CPI increased to 8.7% yoy in February 2021 vs. 5.7% yoy in January (up 1.8% mom). Urban CPI rose to 8.6% vs 5.0% yoy in the previous month, while Rural CPI clocked in at 8.8% vs. 6.6% in January 2021. We think the mom jump in CPI is broadly a reflection of surging global commodity prices (depicted by many indices as discussed below) and the c.15% power tariff hike (an IMF precondition for program resumption). Also note that the February reading could have been higher, had it not been for a high-base (CPI in Feb 2020: 12.4%).
Core inflation, however, remained moderate. Urban core inflation is 6.4% in February vs. 5.4% in January (up 1.1% mom). Rural core inflation, on the other hand, fell to 7.7% vs 7.8% in the previous month (up 0.5% mom). During July-February, Urban and Rural core inflation have averaged 5.6% and 7.7%, respectively.
Urban/Rural Food inflation crept up again to 10.3%/9.1% in February, after reporting a multi-month low in January (7.3%/7.2%). This was driven by non-perishable food items (up c.15% yoy) including chicken, cooking oil, and pulses (the latter two entail imports and are driven by global prices).
Another major reason behind the rise in CPI is the increase in national electricity tariff by c.15%, which drove the Housing & Utilities index up 10.6% yoy (compared with average c.5.0% yoy change in the previous 12 months). We estimate that without the tariff hike, February CPI would have been 1.1ppt lower. Clothing & Footwear rose 11.3% yoy; again, we suspect surging prices of cotton and leather to be the driving factor.
National CPI has averaged 8.3% yoy during July-February period (Urban, 7.2% and Rural, 9.9%) within the SBP’s projected range of 7-9%. While core inflation continues to point to moderate demand-led inflation, the headline CPI remains high and could be higher in the coming months, in our view. Food prices are prone to rising ahead of Ramadan (falling in April 2021), while global commodity prices remain up-trending. Petrol price changes have recently been held back by the government and a potentially big change in future will push CPI higher.
We think that the SBP will overweigh the headline CPI in future monetary policy decisions, as it did in the previous spell of monetary tightening. In this context, the present trends support increase in interest rates as early as May (SBP guided no change in stance till March MPS), in our view.
CPI rebounds to 8.7% in February from 5.7% in the previous month, despite high-base effect
Courtesy – Intermarket Securities Limited