Karachi, October 04, 2022 (PPI-OT): Pakistan Economy: CPI reading surprises estimates

PBS released its monthly consumer price index (CPI) for Sep’22 where the official headline inflation surprised the street’s estimates by clocking in at 23.2%YoY as compared to an increase of 27.3%YoY during the previous month. On a MoM basis, CPI posted a decline of 1.2% compared to an increase of 2.4% last month.

Monthly inflation reading for Sept’22 takes the average CPI during 1QFY23 to 25.1%YoY as opposed to 8.6%YoY. The slide comes largely on the back of 65%/30% YoY/MoM reduction in the index of electricity charges, which is attributable to lower fuel cost adjustments during the month. This also led the first sequential decline in inflation during CY22.

The decline in electricity charges were led by removal of Fuel Cost Adjustment (FCA) component in electricity prices announced in Aug’22 (PkR9.9/unit) for consumers with consumption up to 300 units. With the FCA charges likely to be staggered in the coming months, the impact of the August FCA will impinge monthly outturns going forward.

Apart from the anomaly in the Housing Index, there was little of note that came as a surprise. Food inflation continued to remain strong, settling in north of 30%YoY (13-year highs), while core inflation further increased to 14%/18% for Urban and Rural categories, another decade high.

With MPS committee likely to meet on 10th of this month, all eyes are currently fixated on the outcome of the MPS. With real interest rates in deep negative territory, a case can be made about further hikes in interest rates. However, given the condition of floods in the country, SBP may opt for keeping the interest rates stable at current levels.