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IGI Securities Limited – Day Break

Karachi, January 02, 2018 (PPI-OT): Inflation – Food inflation spikes; Non-food prices continue to lead

As per the latest data published by Pakistan Bureau of Statistics (PBS), Dec-17 headline inflation clocked in at +4.57%YoY (down 0.10%MoM) compared to +3.70%YoY (down 0.68%MoM) in the same period last year

The non-food basket (up +5.1%YoY in Dec-17) has demonstrated a steady growth in 1HFY18, averaging +5.0%YoY growth

Food basket inflation remained modest in 1QFY18, averaging +1.2%YoY, but picked up pace in 2QFY18, clocking in at an average of +2.8%YoY on the back of +3.8%YoY rise in food inflation for Dec-17, pulling 1HFY18 average food basket inflation to +2%YoY

Core inflation recorded a steady growth trend in 1HFY18, posting a figure of +5.45%YoY

Outlook on inflation, for the remainder of FY18, is dependent upon the demand pull inflationary pressures created by government spending at the end of election cycle as well as the policy of PKR depreciation that is implemented

Dec-17 inflation clocks in at +4.57%YoY

As per the latest data published by Pakistan Bureau of Statistics (PBS), Dec-17 headline inflation clocked in at +4.57%YoY (down 0.10%MoM) compared to +3.70%YoY (down 0.68%MoM) in the same period last year. This translates into 1HFY18 average inflation of +3.76%YoY with growth in Dec-17 price level being the highest in the 6 months of FY18. For the month of Dec-17, non-food index continued its healthy grow (up +5.12%YoY), while food index recorded significant gains (up +3.79%YoY) following weak food inflationary pressure at the start of the fiscal year.

Non-food inflation demonstrated robust growth with steady trend in 1HFY18

The non-food basket (up +5.1%YoY in Dec-17) has demonstrated a steady growth in 1HFY18, averaging +5.0%YoY growth. For the period of 6 months mentioned, the major factors for the uptick include house rent index (HRI) (up +6.8%YoY), education index (up +11.12%YoY), health index (up +11.45%YoY) and transport index (up +3.66%YoY). We expect this trend to build up further in 2HFY18 as direct impact of PKR depreciation continues to raise prices.

While food-inflation has exhibited weak growth albeit with a rising trend

Food basket inflation remained modest in 1QFY18, averaging +1.2%YoY, but picked up pace in 2QFY18, clocking in at an average of +2.8%YoY on the back of +3.8%YoY rise in food inflation for Dec-17, pulling 1HFY18 average food basket inflation to +2%YoY. The steep rise in food inflation in the later part of 1HFY18 originates from rise in prices of perishable food items (up ~+19%YoY in 2QFY18 compared to ~+6%YoY in 1QFY18) while cigarette prices continue to be the dampener (down ~17%YoY on average in 1HFY18). We anticipate a further rise in food prices in months to follow as indirect impact of PKR depreciation seeps into the economy.

1HFY18 witnessed a robust growth in Core inflation

Core inflation recorded a steady growth trend in 1HFY18, posting a figure of +5.45%YoY. Also an indicator of aggregate demand, core inflation is expected to grow faster in 2HFY18 as demand pull inflationary pressures continue to build up. This could undo the subdued headline inflation in the remainder of FY18.

Demand pull inflation as well as external sector vulnerabilities to dictate inflation in 2HFY18

Outlook on inflation, for the remainder of FY18, is dependent upon the demand pull inflationary pressures created by government spending at the end of election cycle as well as the policy of PKR depreciation that is implemented. The expected surge in government spending might lead to a further rise in aggregate demand which could translate into higher price levels. Simultaneously, if the PKR were to be depreciated further, it will lead to rise in inflation through its direct and indirect impact on the economy.

Furthermore, the increase in oil rates in recent months will translate into higher domestic energy prices which will fuel inflationary pressures. However, the administered nature of fuel prices, wherein, the government can reduce the inflationary impact of hike in oil rate by reducing taxes, may lead to a contained increase in general level of prices.

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