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IGI Securities Limited – Day Break (August 05, 2022)

Karachi, August 05, 2022 (PPI-OT): Monthly Inflation Review – July-22: Inflation Tops to a multi-year of +24.9%; More Pain on the Horizon

For the month of Jul-22, monthly inflation tops a 14yr high to 24.9%y. On a monthly basis, index grew by +4.34%m. For urban and rural price indices posted a growth of +23.6%y and 26.9%y respectively.

Major contribution during the month came from Food and Utility/rent carrying index weight of 34.6% and 23.6% respectively. Food price index posted a growth of +5%m/m (+30%y/y). Under non-food items electricity charges registered a massive +39%m/m increase, owing to recent increase in tariff by NEPRA. Seconded by, Motor fuel which is up by +7.35%m/m.

The fact that we are still in the middle of adjusting to increasing electricity tariffs, imported inflation due to higher exchange rates, elevated global commodity prices, and fuel prices hike, and finally the second round effects of these adjustments. This will keep overall CPI elevated in the near term.

We review latest Consumer Price Index (CPI) growth numbers published by Pakistan Bureau of Statistics (PBS) for the month of Jul-22.

Inflation Tops to a multi-year of +24.9%

For the month of Jul-22, monthly inflation tops a 14yr high to 24.9%y. On a monthly basis, index grew by +4.34%m. For urban and rural price indices posted a growth of +23.6%y and 26.9%y respectively. On a monthly basis urban inflation jumped by +4.5% compared to slightly slower rural growth of +4.2%m.

Food, Utility and transport added the most to monthly inflation

Major contribution during the month came from Food and Utility/rent carrying index weight of 34.6% and 23.6% respectively. Food price index posted a growth of +5%m/m (+30%y/y). Perishable food items such as vegetables showed massive jump of +25%m/m, while, non-perishable Food Items including pulses increased by +10%m/m on an average.

Under non-food items electricity charges registered a massive +39%m/m increase, owing to recent increase in tariff by NEPRA. Seconded by, Motor fuel which is up by +7.35%m/m; reflecting the price increase to PKR 241/ltr for Motor Sprit Oil (MS) and PKR 270/ltr for High Speed Diesel (HSD) by Jul-22 end, from PKR 180/ltr and PKR 174/ltr for MS and HSD respectively recorded during Jun-22.

Outlook: More Pain on the Horizon?

On the outlook, we think inflation pain is likely to persist in the near-term unless there are some positive surprises on energy prices (Electricity, Gas, POL etc.). Having said recent report from IMF suggests global inflationary levels are all set to decline, “Inflation is generally expected to return to near pre-pandemic levels by the end of 2024.”

“With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers. Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them.” — IMF WEO July 2022

Adjusting to administrative energy price hike and PKR depreciation will elongate the inflationary pain

For Pakistan, the case of inflation is rather different, mainly as we adjust to administrative energy price hike and PKR depreciation. By simply assuming a no monthly increase in inflation, low base effect from last year will keep CPI growth numbers in its early 20% at least till Oct-22. From there onwards, low base effect will ward off bringing inflation growth numbers back to teens.

However, we are certain this might be not be case and inflation is likely to print a monthly growth in the range of 0.5%-1.5% on average. The fact that we are still in the middle of adjusting to increasing electricity tariffs, imported inflation due to higher exchange rates, elevated global commodity prices, and fuel prices hike, and finally the second round effects of these adjustments. This will keep overall CPI elevated in the near term.

Finding a trade-off between inflation and growth

Elevated inflation will and is complicating the trade-offs State Bank of Pakistan (SBP) is facing, choosing between containing price pressures and safeguarding growth. The monetary statement announced in Jul-22, SBP raised policy rate further by 125bps to 15% to prevent de-anchoring of inflation expectations of 18-20%. Hence for the time being we think, SBP is more likely to keep inflation anchoring as it main agenda.

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