Macro Analysis /

Pakistan Economy: June inflation to make a fresh peak; expect FY23 to near 18%

  • Pakistan’s June 22 inflation to reach 18.2% as secondary impact of fuel inflation starts to emerge

  • Monthly inflation prints will near historic highs before autumn as energy subsidies are removed

  • Another rate hike seems likely in order to bring alignment of monetary and fiscal setting

Intermarket Securities
27 June 2022

Pakistan’s headline inflation for June is expected to reach 18.2% as secondary impact of retail fuel prices on food inflation has started to emerge. Given the relatively soft print last year, monthly inflation will near historic highs before autumn as government unreeled the energy subsidies amid rising oil prices. More importantly, from government’s attempt to put levies/taxes on fuel price in subservience to IMF in resuming the stalled programme.

  • Fuel inflation is likely to witness the most significant rise in June, +23% mom, owing to the removal of Price Differential Claims (PDC) from the fuel prices and its impact relaying onto transport fares. Both the fuel prices and the transport services index make for three-fourth of the transport index. Inflation from transport index may unlikely be priced in completely as the components in motor vehicles basket have ceased to exist, e.g. Suzuki Mehran and Toyota Corolla 1.3 XLi variant; warranting a revision in CPI commodities to be able to reflect better on imported inflation in Pakistan. 

  • Food inflation will continue adding massively to CPI reading in June as it continues to be impacted heavily from rise in fuel prices. During Jun’22, 20 out of 25 food item prices that are reported under Sensitive Price Index (SPI) have increased from last month, both perishable and non-perishable food items; primarily eggs, edible oil, pulses and vegetables. Chicken prices are likely to stabilize as Eid-festivity approaches; however, food inflation will likely remain sensitive to seasonal Eid-demand spikes, such as tomatoes and onions.

  • Beverage inflation will also add to inflationary outturns in June as prices of tobacco continue to rise owing to supply constraints. Additionally, taxes in the current budgetary changes will also lead to higher inflationary outturns, going forward.

Inflation for FY23 to likely near 18%: The inflationary outturns are likely to make a new peak in the following months on the back of rising fuel prices from levies and taxes as the government brings budgetary changes. As per news flows, the petroleum levy (PDL) is slated to be priced in at PKR10/litre in July, followed by a PKR 5/litre hike until March 2022, translating into an average PDL rate of PKR37.5/litre for FY23. While sales tax is suggested to be implemented at a later stage, the recessionary-fears-frazzled oil markets can provide a cushion to higher than expected inflationary outturns. We expect inflation to average c.18.0% in FY23, which bears upside risk from higher inflation outturns in other indices i.e. food, restaurant, etc. Since inflationary expectations have started to mount, SBP has restarted providing liquidity via higher tenor OMOs to stabilize cut-off yields in T-bill auctions despite high bids. We believe, another shift in the Policy Rate by 100bps is warranted despite, SBP actions regarding enhancing liquidity, more importantly to align with the proposed fiscal contractionary settings of Budget FY23.