Macro Analysis /

Pakistan: Inflation continues to decelerate

    Saad Ali
    Saad Ali

    Head of Research

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    2 July 2019

    CPI (headline inflation) for June was 8.9% yoy vs. 9.1% yoy in May, much lower than consensus estimate of 9.5%. This takes FY 19 average inflation to 7.33% (vs. 3.92% in FY 18). NFNE (core inflation) remained stable at 7.2% in June (FY 19 average 7.9%).

    This is the second consecutive CPI reading which came in softer than market expectations. The softness is largely attributable to seasonally lower prices for perishable food items (fresh fruits and vegetables in particular). Prices for food items tends to normalise in the months following Ramadan (which fell in May this year vs. June last year). Hence, we expect the softness in food inflation to reverse in the coming months and CPI to normalise higher (all else the same).  

    The bulk of the decline in CPI was led by a drop in Perishable Food Items Index (-5.45% yoy). Among these, the following items witnessed a decline: fresh fruits (-12.3% yoy), tomatoes (-9.2% yoy), chicken (-5.2% yoy) and fresh vegetables (-2.65%). 

    We think July onwards, CPI will likely jump to reflect the large increases in gas and power tariffs, the initial impact of the recent 7% PKR depreciation and budgetary measures. This is notwithstanding present trends in food inflation. 

    We think the softer-than-expected CPI readings in May-June will have little impact on the upcoming MPS, where the State Bank of Pakistan is expected to increase policy rate further, because CPI can potentially touch 11% during Q1 FY 20, in our view.