National CPI is expected to clock in at 12.2% yoy in February 2022, down from 13.0% in January (latter was affected by low base). On a mom basis, CPI is expected to increase by 1.1%, compared with 0.39% in January; it is lifted by higher prices of major food items and petrol. February will also be the third consecutive month, in which CPI reading will exceed 12%. Expected Rural inflation of 13.2% yoy will be higher than expected Urban inflation of 11.5% yoy in February.
Core inflation (NFNE) in February, however, is expected to decelerate. We estimate 8.5% (7.8% and 9.0% for Urban and Rural centers, respectively) lower than average 8.8% in last two months. It will be the first time in four months that core inflation will increase by less than 1% mom (by c.0.4% mom).
Food and Transportation indexes will be the major contributors to sequentially higher CPI. Food inflation will rise significantly in February, by 2% mom against a decline of 0.4%/3.3% mom in January/December. Significant increase in prices of perishable items (tomato, fruits and vegetables), in addition to chicken and cooking oil prices, was seen during the month. On the other hand, Transportation index is likely to increase by 3% mom, and this will also be higher than last two months’ average increase of 1.2% mom. Local petrol prices rose by an average of 5.1% mom, which will increase the cost of transportation in general (full impact will come through in March, coupled with further hikes).
Outlook for CPI and Monetary policy: We expect the headline CPI to peak near 14% in the next six months. This is partly led by expectation of higher local petrol prices following the surge in global oil prices, coupled with potentially higher Food inflation ahead of Ramadan and Eid season. Beyond October 2022, however, CPI is expected to revert to single digits, partly because of a high base effect. 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. However, military tensions between Russia and Ukraine is a new variable and can keep global commodity prices elevated for longer than earlier expected. Given that non-oil CAD has been manageable and that monetary policy may have limited impact on demand for petroleum and food in Pakistan, the SBP may keep the policy rate unchanged in March MPS.