JS Securities Limited – Daily Briefing

Karachi, June 10, 2019 (PPI-OT): CPI increased by 0.78% MoM in May; FY20 CPI most likely to end up in double-digit territory

Headline inflation stood at 9.11% YoY during May-2019; moving up by 0.78% MoM on the back of higher food inflation, whereas higher motor fuel prices and surge in clothing and footwear ahead of Eid shopping also contributed to the jump in inflation.

It will be hard to contain inflation within single digits in the upcoming year; despite an overly ambitious 8.5% target set by the government.

The Minister of Planning has given his consent for implementation of new base year (FY16) for CPI. It is pending ECC approval and the new mechanism will provide greater weight in the CPI basket to rural centres to provide a more balanced view of inflationary trends.

One positive takeaway has been the planning minister’s admission of the need of a more autonomous statistics department. However, recent steps to place PBS under the planning ministry seems counterintuitive to that very purpose.

CPI increases by 0.78% MoM during May

Headline inflation during May-2019 stood at 9.11% YoY, compared to 8.82% YoY during Apr-2019. Although inflation was higher when compared to the preceding month, it was nevertheless lower than industry expectations after some time. Sequentially, inflation increased by 0.78% MoM, where three major categories contributed the bulk of the increase (~80%), namely (1) food inflation (+1.15% MoM), (2) transport (+2.81% MoM) led by motor fuel (+6.00% MoM), and (3) Clothing and Footwear (+1.36% MoM). Undoubtedly, the Ramadan and pre-Eid shopping factors played a significant role in (1) and (3), whereas higher motor fuel prices were primarily on account of increase in local petroleum prices during the previous month, i.e. Apr-2019. Headline inflation during 11MFY19 averaged 7.19% YoY, i.e. well within the SBP’s forecasted 6.5-7.5% range for FY19. Core (NFNE) inflation crept up to 7.2% YoY during the month from 7.0% YoY in the preceding month; whereas during 11MFY19, it averaged 8.04% YoY.

Key observations regarding inflation outlook

The government’s inflation target for FY20 (8.5% YoY) seems achievable only if oil prices were to somehow nosedive below US$50/bbl. Other than this, it is hard to imagine any other rationale to suggest that inflation would be contained within single digits in the upcoming year. For the sake of argument, let’s assume for a moment that FY20’s headline inflation comes at 8.5% YoY. In that case, it is certain that the central bank has excessively increased interest rates. For the record, although it is still too early to provide an estimate (since further details on budgetary and IMF measures are awaited), we would be surprised to see average inflation in single digits for FY20.

Moreover, regarding inflation expectations for FY20, a lot will depend on factors such as (1) by how much electricity and gas prices are increased and the timing of these increases, (2) the quantum of increase in GST and other indirect taxes, and (3) the outlook of the Pak rupee, which in our view is still facing serious headwinds, unless there are substantial positive developments on the debt rescheduling front, which does not seem to be the case based on available information. That said, debt rescheduling should be a relatively less cumbersome exercise following IMF’s stamp of approval. However, the situation at the moment is that news flows are suggesting the IMF program is technically worth ~US$3bn rather than the publicly advertised US$6bn, net of repayments to the IMF.

It remains to be seen when the rebasing of the CPI is implemented, given that the governing body of the Pakistan Bureau of Statistics (PBS) headed by the Minister for Planning, Development and Reform has given his consent and it remains subject to ECC approval. The new base year for CPI will be FY16 (since the household integrated survey was also conducted in the same year) from the previous base year, i.e. FY08. For the new base, PBS will compile an urban, rural and national CPI on a monthly basis. Additionally, the number of items in urban areas would be reduced and items in rural areas added to provide greater representation to rural areas. Previously, news flows were indicating that the new rebasing mechanism would be implemented from the start of FY20; however, there have been no updates in this regard in recent months.

Need for autonomy in data collection

One positive takeaway has been the planning minister’s own admission of the need for robust data collection, which will aid in better policy and decision-making. This also aligns with the view of the incumbent government of providing greater autonomy to institutions to be able to perform their functions more freely and efficiently. Ideally, the statistics department should have made fully autonomous, an initiative which was undertaken by the previous Prime Minister. However, the decision to place PBS under the planning ministry will ensure that conflicts of interest will remain and the goal of unbiased data collection will most certainly remain a pipe dream.

Leave a Reply