Macro Analysis /

Pakistan Economy: Energy prices push CPI to 22-month high in December

  • Inflation in Pakistan continues to rise, at a 22-month high of 12.3% in December

  • Recent increase in base power tariff and cost of transport are major drivers of the worse outturn

  • The SBP has guided for a probable status quo stance in January MPS, even as inflation remains high

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
3 January 2022
  • National CPI rose a sharp 12.3% yoy in December 2021, the highest reading since February 2020, up from 11.5% in November (Index is flat mom). Urban CPI rose to 12.7% (12.0% in November), while Rural CPI was 11.6% vs. 10.9% the previous month. Key worsening factors during December were higher electricity tariff and cost of transport. National CPI averaged 9.8% during 1HFY22, compared with 8.6% same period last year.

  • Core inflation (NFNE) in December rose sharply for the third consecutive month (up c.1% mom). Urban and Rural core inflation rose to 8.3% and 8.9%, respectively, up from 7.6 and 8.2% the previous month. The rise in core inflation was broad-based, where nearly all major non-food and non-energy indices were up more than 10% yoy, partly due to the recent PKR depreciation and second-round effects of high inflation in recent months.   

  • Food inflation, however, was milder than in recent months – at 11.7%/9.0% for Urban/Rural, down 2.3/3.1ppt mom. Perishable food prices were significantly down mom (more than 15% in case of the major items). The government’s strategy to import and stock excess wheat and sugar has seemingly helped contain prices of non-perishable food items.  

  • Major push to the CPI came from 17% yoy increase in Housing & Utilities index, largely due to the 14% increase in electricity base tariff (IMF pre-condition); while the Transport index jumped 24% yoy due to record petrol prices in recent months.    

Outlook: It is possible that CPI in January exceeds 13% yoy and remains between 11-12% until June 2022. Yet, the SBP has guided for a status quo stance in the January MPS while it has aggressively conducted OMOs since the December meeting, aimed at aligning money market rates with the policy rate (presently about 175bps apart). The stance will prove appropriate if there is a meaningful normalization in global commodity prices towards mid-2022 and moderate PKR depreciation hereon.