National CPI is expected to clock in at 12.3% yoy in April 2022, down from 12.7% in March – majorly due to lower Food and Housing & Utilities indices. On a mom basis, CPI is expected to increase by 0.6%, which will be lower than the increase in the last two months (0.8% / 1.2% in March / February). Lower increase in Food inflation and negative change in Housing index will limit the sequential change. Rural inflation is expected to clock in at 14.0% yoy, higher than the expected Urban inflation of 11.1% yoy.
Core inflation (NFNE) is expected to remain muted in April at 9.6%. This will be the second consecutive month that core inflation surpasses 9.0%, compared with an average of 8.1% in last six months (Sep’21 to Feb’22). Key indices which are contributing to the rise are Clothing & Footwear, Education, and Health.
Food and Clothing & Footwear inflation will be the major contributors to sequentially higher CPI. Food inflation is likely to increase by 1.1% mom, lower than the last two months average of 2.4%. The Clothing & Footwear index is expected to rise by 2.2% mom in April, higher than last two months average of 1%. The mom increase is led by the surge in fruit prices and cooking oil, whereas clothing and footwear products increased on account of Ramadan and Eid festivities. CPI outturn for April would have been higher than our current estimate, had the government removed subsidy on petroleum and electricity. This subsidy is likely to be withdrawn on a staggered basis from early May.
Outlook for CPI and Monetary policy: Going forward, if the new government revises the subsidy on petroleum and electricity prices from May on a staggered basis, then we expect headline CPI to cross 15% yoy in the next few months. This is partly because of currency devaluation, increase in commodity prices and low base effect (single-digit readings between June and October 2021). Beyond January 2023, however, CPI is expected to revert to single digits, partly because high-base effect will kick in, while international energy and commodity prices are expected to normalize. In an emergency MPC meeting held earlier in the month, the SBP increased the policy rate by 250bps to 12.25%. We expect no change in the policy rate in the May meeting.