Karachi, February 02, 2023 (PPI-OT): Jan-23 CPI shoots to 27.6% – more awaits in Feb-2023

CPI for Jan-2023 surpassed street estimates (~25.9%), clocking in at 27.6% YoY, qualifying for among the top 10 CPI readings in Pakistan’s history with MoM increase coming in at 2.9%. On a cumulative basis, overall price levels measured by CPI are up 14.5% in the last seven months – an increase that usually takes ~1.5 years to transpire.

Jan’s CPI readings do not incorporate the impact of recent devaluation or POL price hikes and have still come in higher than expectations. This sets the base higher for upcoming CPI readings which will reflect impact of ongoing and prospective macro adjustments, compared to previous base case. Feb CPI data point will be closely tracked by market given recent adjustments.

While our base case CPI estimate for Feb works out to be 32.9%, we share a sensitivity to changing energy and food prices to reflect the possible swing in headline CPI if price hikes in these critical components differ from our base case.

Jan-2023: Tall food inflation pulls headline inflation to 27.6%

CPI for Jan-2023 once again surpassed street estimates (~25.9%), clocking in at 27.6% YoY, qualifying for among the top 10 CPI readings in the country’s history with MoM increase coming in at 2.9%, where food inflation was the key driver. For perspective, jump of a similar quantum is usually witnessed in a span of ~1.5 years. To note, pressure from the Rural segment has been aggravating, which is reflected across the board.

Key reason for the high inflation reading was higher food inflation. The segment, constituting 35% of the CPI basket, has already been reporting a higher pace of increase since some months, remaining above 30% since Sep-2022. In Jan-2023, food inflation clocked in at 42.9% YoY, marking a 5% MoM increase. This was led by increase in heavy-weight items such as Wheat (+15% MoM), Rice (+17% MoM), Chicken (+23% MoM) and fresh fruits and vegetables (+9% MoM).

Core inflation gets another push

Continuing ongoing trajectory, core inflation further increased in Jan-2023. The Non-Food Non-Energy (NFNE) inflation for Rural region increased by 19.4%, where Urban NFNE was recorded at 15.4%. These levels again are highest witnessed in the last 13 years. The higher core inflation indicates second round of inflation in various segments of the inflation basket, which are likely triggered by the sharp energy prices and PKR depreciation witnessed in the past couple of months. We highlight, though the trend of wholesale price index (WPI), the indicator measuring price trends of goods before sold at retail, has softened from its recent peak, it is still clocking in at 28.5%.

Brace for PKR devaluation impact in coming months

Higher CPI reading is foreseeable in the near future, given direct impact of PKR devaluation on ~20% of the CPI basket accumulated by fuel, edible oil and items for which Pakistan is a net importer and now a higher base set in Jan-2023.

For Feb-2023, assuming higher food prices led by higher transport costs (Rs35/ltr hike in MS and HSD in Jan-2023 end), higher POL products and higher gas and electricity prices, our previous base case projected sequential CPI increase of 5.4%, which took Feb-2023 CPI to 30.4%. Now with the higher Jan-2023 base, the 5.4% MoM increase would take our Feb-2023’s CPI estimates to 32.9%.

Please find sensitivity on Feb-2023E’s readings below reflect the possible swing in headline CPI if price hikes in these critical components differ from our base case. Please note, these numbers only reflect the first-round impact, that is the direct impact. A second-round impact also usually follows, broadly reflected in prices of other food and household related items.