Macro Analysis /

Pakistan inflation hits 13-year high; higher outturns ahead

  • Pakistan’s CPI hit 13-yr high of 21.3% in June after food and fuel inflation rose from subsidy removal

  • The MoM inflation is at all-time high of 6.3%, also carrying higher reading from other indices

  • Budgetary measures will also keep inflation readings on the higher side coupled with the push from June base

Intermarket Securities
4 July 2022

Pakistan’s headline CPI hit 13-year high of 21.3% in June, higher than expectations (IMS Estimate: 18.2%), after the fuel inflation spiked from subsidy removal and the food inflation exacerbated from high transport costs. The sequential change in mom inflation is at an all-time high of 6.3%. The inflation print also carries higher outturns from clothing, tobacco, and restaurant index. Budgetary measures from the recently approved Finance Bill will also keep inflation readings on the higher side, coupled with the push from the new base set by the June print.

Food and fuel inflation is not sticky anymore

Food inflation continues to get marred by higher transport and electricity cost as prices of most food commodities kept rising. During June 2022, the commodities that added the most are rice, milk, eggs, edible oil, and vegetables. Most of this rise is not seasonal as higher food prices will likely continue over the course of FY23 after transport costs increased from petroleum levy. This will also continue to have a negative bearing on indices such as clothing, furniture and restaurant.

We believe, another round of food inflation is in the offing, also taking leads from the recent SPI prints. The seasonal rise in tomato and onion prices ahead of Eid festivity is likely to keep monthly prints on the higher side. The only solace in food inflation, which might come with a lag, is edible oil where international palm oil has come off by 45% from its peak of c.US$ 1940/ton in March 2022 after Indonesia lifted a temporary ban.

Core inflation at alarming levels

Core inflation print for Urban during June stood at 11.5%, jumping from 9.7% last month. Similarly, core inflation for Rural increased to 13.6% in June against 11.5% in the previous month. Debarring skewed observations from the monthly prints, true underlying rate of inflation is in late teens, which is depicted from the recent spike to 16.7% (Urban) and 19.1% (Rural) in core trimmed inflation.

Higher base warrants a revision in estimates

The June print sets a higher base for monthly outlook on inflationary outturns. On the other hand, the electricity generation costs continue to remain high, also visible from the recent approval of PKR 7.9/unit Fuel Cost Adjustment approved last week, which is nearly twice of prior month. In a catch up game to actual prints regarding our revised monthly projections, we estimate August will likely witness a peak of c.24% and FY23f average has scaled up to 20.2%.

Fiscal tightening by authorities, in subservience to the IMF, through the approval of amended Finance Bill 2022. However, recent changes in Moodys’ and Fitch’s stance on Pakistan will likely limit the pace of potential external support, as it faces tighter global funding conditions. Hence, monetary settings need to level up with the recent shift in fiscal settings; hence, we reiterate a hike of 100bps.