Macro Analysis /

Pakistan’s CPI clocks in at 24.9% in July 22; 100bps hike in the upcoming MPS

  • Seasonal food price spikes and higher energy prices have put Jul’22 CPI at 24.9%, against our estimate of 24.1%

  • Aug’22 print is estimated at 26%, however, some respite can come from softening of commodity prices

  • Revised FY23E inflation is 22% and we expect SBP to hike 100bps in light of recent PKR devaluation and fresh SPI prints

Intermarket Securities
1 August 2022

Seasonal food price spikes from Eid-festivity and higher energy prices, underpinned by currency devaluation, have put Jul’22 CPI at 24.9%, against our estimate of 24.1%. Both the headline and core (trimmed) indicators have nearly doubled over last couple of months and short-term outlook carries higher outturns, c.26% in Aug’22. Some respite ahead can only be seen from commodity price softening. Also, we have revised upwards, FY23 inflation estimate to 22% (previously 20%) following the recent exchange rate devaluation and fresh CPI/SPI prints. Simultaneously, we expect SBP to raise policy rate by 100bps to remain proactive in barricading against a de-anchoring of inflationary expectations.

  • Food inflation of 29% YoY is the highest since Oct’08 where most of the secondary impact from higher retail fuel prices continues to affect supply costs. The prices of fresh vegetables, wheat, milk, edible oil and pulses have continued to exacerbate the impact on food inflation. As mentioned earlier, a few weeks’ lag is carried by domestic edible oil prices to translate the impact of softer int’l palm oil prices in Pakistan. A key reason for this lag is the high inventory being held by local suppliers.

  • The housing index rose to an all-time high of 8.8% MoM, well above the previous high of c.4.0% seen in Jul’19, as two key changes coincided i.e. the quarterly adjustment in house rent index and the fuel cost adjustment (FCA) of PKR 7.9/unit in electricity tariff. Electricity tariff was a key needle mover during Jul’22 (+39.4% MoM). Needless to mention, FCA for Aug’22 stands at PKR 9.9/unit, keeping the housing index a key contributor to the inflation reading, going forward.

  • Retail fuel prices continue to add significantly to the transport index, and they also continue to relay into domestic travel fares, essentially translating into a broader rise in the transport index. We believe a key movement in the transport index in Aug’22 can come from the rise in car prices announced by manufacturers at the end of Jul’22 in the aftermath of PKR losing c.15%.

  • National core inflation is at an alarming level of 13% while trimmed core inflation has nearly doubled over the last few months to 20.1%. Some abatement in the increasing trajectory was witnessed in the Jul’22 reading, however, these levels affirm a high inflation outlook for Pakistan.

Is there a rate hike ahead?

The current FX liquidity situation remains fluid. We have seen a mild form of correction in exchange rate as the government attempts to get an expedited release of USD1.2bn tranche by the IMF. Moreover, the recent phase of economic consolidation requires import bill curtailment to sustain over the next few months.

While the rise in fuel prices and potential power tariff hikes will keep inflation elevated in the near term, we believe CPI print will peak in Aug’22 unless an upcoming month witnesses aggressive inflationary adjustments in key indices across the board, i.e. energy tariff hikes, quarterly house rent index adjustment, retail fuel price and food price spikes coinciding with each other. SBP continues to point to concerns over higher inflationary outturns, and that the second round effects from the demand side are visible in inflation.  With the new base of Jul’22, our revised FY23 inflation forecast stands at 21.76%, possessing upside risks from higher electricity and gas tariffs.

Despite SBP’s proactive approach towards monetary tightening (125bps) in the last round, we believe, another hike of at least 100bps in policy rate is in the offing when SBP meets on 22Aug’22, more specifically after PKR lost c.15% value against USD in a month (Jul’22). While some respite on the external side is expected upon receipt of the IMF tranche, the foreign exchange liquidity shortage has garnered more attention than ever.