National CPI for February 2022 clocked in at 12.2% yoy, in line with our expectation. It has come down from 13.0% in January (which was affected by a low base); it is the third consecutive CPI reading of over 12%. On a mom basis, CPI rose by 1.2%, compared with 0.4% in January, driven majorly by changes in the Food and Transportation indices. Rural and Urban inflation came in at 13.3% and 11.5% yoy, compared to 12.9% and 13.0% in January, respectively.
Core inflation (NFNE): Urban core inflation decelerated in February to 7.8% yoy from 8.2% in January (up 0.8% mom); whereas, Rural core inflation has increased to 9.4% in February, slightly higher than previous outturn of 9.0% (up 0.9% mom). It is the first time in four months that core inflation rose by less than 1% mom.
Food and Transportation indices were the major contributors to sequentially higher CPI. Food inflation has risen by 2.5% mom, mainly due to elevated perishable food prices (tomato, fruits and other vegetables), in addition to higher chicken and cooking oil prices. On the other hand, Transportation index increased by 3.6% mom in February (up 25% yoy), faster than last two months’ average increase of 1.2% mom. Local petrol prices rose by an average of 5% mom to record levels.
Outlook for CPI and Monetary policy
Yesterday, PM Imran Khan announced a relief package with a PKR10/liter reduction in petrol and diesel prices; which is likely to push down Transportation index from March onwards, in our view. The package also included a reduction in power tariff of PKR5.0/kWh for certain consumers. We estimate that the combined effect of the two measures is a reduction in future inflation by 1.0-1.5ppt, all else the same. Inflation over the next six months will average around 12% vs. our previous estimate of c.14%. We expect inflation to slip into single digits post October 2022, mainly due to a high base effect and potential moderation of global commodity prices.
The SBP has guided that future monetary policy will look through transitory trends in global commodity prices and focus on the average inflation for next 12 months. The relief package moderates outlook for inflation – in the context of Russia-Ukraine conflict and elevated commodity prices – but makes fiscal policy more expansionary than earlier. On balance, we think that the SBP will keep the policy rate unchanged in March MPS; but future MPS will also account for the extent of fiscal deficit (FY23 Budget is crucial), not just the inflationary outlook.