Macro Analysis /

Pakistan: Two inflation readings in August, both encouraging

    Saad Ali
    Saad Ali

    Head of Research

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    4 September 2019

    Pakistan's August CPI came in at 11.6% (Base: 2007-08) and 10.5% (Base: 2015-16), up from 10.3% and 8.4%, respectively in July. This is the first month of the new CPI, which is now based on 2015-16. We understand that the two inflation readings will run parallel for some months. Also, under the new method, PBS will now post separate CPIs for rural and urban.

    Core inflation (NFNE) is 8.5% (Base 2015-16; urban) and 8.2% (Base 2007-08). Average CPI for 2M FY 19 is  9.4% (Base 2015-16) and 10.9% (Base 2007-08).

    CPI based on 2008-09 is in line with our estimate of 11.65%. Inflation is up 1.4% mom due to (i) higher prices of perishable food items and chicken (the former may be affected by shortage amid halting of trade with India); (ii) higher gas tariff (the recent change was fully reflected in Aug’19); and (iii) higher transport prices.

    Key changes in the new CPI basket:

    • Weight of food index is little changed at 34.5% vs 34.8% earlier. We were expecting the weight to be reduced as households spent more on other necessary and leisure items amid a growing economy and stable food prices during the past 5 years.
    • Weights of housing, water, electricity and other fuels reduced to 23.6% from 29.4%. The transport index weight also lowered to 5.9%  from 7.2%. Hence, the impact of recent PKR depreciation and higher oil and gas prices has been moderated with these two changes. Future CPI also becomes relatively less sensitive to currency slips, in our view.
    • In contrast to the weight of food and non-alcoholic beverages remaining the same, the weight of restaurants and hotels (recreational) has risen substantially to 6.9% from 1.2%. This index previously included only ready made food, but now includes marriage hall charges and accommodation services.
    • Effective contribution of food (sum of food and restaurant indices) has risen. This suggests that the future volatility in the index may not be lower as a result of the re-basing, in our view.

    We think the 1ppt lower CPI (on re-basing) will likely not affect monetary policy immediately. Relatively moderate reading on the old base (<12%) may encourage the State Bank of Pakistan (SBP) to maintain the policy rate at 13.25% in the Sep’19 MPS. This is also supported by tangible improvement in CAD (Jul’19 US$579mn vs previous 12-month average of US$1.0bn). Going forward, the key concern will be a wide fiscal deficit, which may dissuade SBP from decreasing interest rates earlier than suggested by the expected inflation trajectory. KSE-100 rose by 1.5% today, possibly due to expectations of an imminent interest rate cut.