Based on SPI data published by the Pakistan Bureau of Statistics (PBS) and other adjustments, we expect Oct’21 CPI-based inflation to register at 8.53% compared to 8.98% and 8.91% YoY in Sep’21 and Oct’20, respectively. This will take 4MFY22 average inflation to 8.57% vis-à-vis 8.86% in SPLY.

Inflation to exhibit a MoM increase of 1.3%

Monthly inflation is forecasted at 1.3% for Oct’21, in contrast to the average monthly inflation of 1.33% in 1QFY22. Critical factors for MoM increase in CPI reading are expected to be transport, household equipment, housing, and food inflation, likely to post a jump of 5.8%, 1.9%, 1.3%, and 1.1%, respectively. During Oct’21, the pace of MoM increase in the food index is likely to slow down with the government’s decision to intervene in the market to control prices of food items. We expect Chicken (+19% MoM), Tomatoes (+23% MoM) and Potatoes (+7% MoM) to be significant contributors behind the monthly surge, while major laggards that would lower the impact will be Fresh Fruits (-12% MoM), Onions (-10% MoM). Moreover, Housing and Household equipment indices are expected to witness an uptick of 1.8% MoM and 2.2% MoM, respectively, owing to quarterly house rent adjustment, the surge in construction cost, LPG and washing detergents prices. In addition, an increase in petroleum products prices will keep the Transport index up 5.8% MoM.

CPI and MPS Outlook

With average CPI inflation for the first three months of FY22 coming in at 8.86%, we estimate full-year FY22 CPI-based inflation to remain slightly above 9%. The thesis is premised on higher crude oil prices, increase in electricity tariff and continuous decline in the exchange rate parity.

In its Sept’21 policy, the State Bank of Pakistan (SBP) finally resumed monetary tightening by hiking the benchmark policy rate by 25bps to 7.25% on the monetary policy front. The MPC, as previously, reiterated that the policy response should transition from prioritizing growth to now ensuring sustainability. Although inflation remains contained, vigorous domestic growth coupled with multi-year high international commodity prices is expected to stress the current account.

Courtesy – AHL Research