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JS Securities Limited – JS Research (November 23, 2022)

Karachi, November 23, 2022 (PPI-OT): Nov-2022E CPI to reflect marginal relief

We expect CPI reading for Nov-2022 to clock in at 23%, in the scenario of no further adjustment in electricity prices, taking 5MFY23E headline inflation to 25%.

We expect various inflation head items to soften pace on account of minimal sequential increase in food and fuel price this month. We also expect core inflation to reduce to ~14.5% YoY, lower than previous month’s increase of ~17.5% YoY, slightly reducing 5MFY23 to ~17.3% YoY (4MFY23: ~18% YoY).

Key risks to our average FY23 projections of 23% are increase in electricity and gas tariffs amid ongoing IMF program. To recall, the government is facing fiscal challenges amid lower than targeted revenue collection and may opt for tapping further revenue avenues and / or controlling expenditures via subsidy reduction.

Nov-2022 CPI likely at 23% YoY

We expect CPI reading for Nov-2022 to clock in at 23%, in the scenario of no further adjustment in electricity prices, taking 5MFY23 headline inflation to 25%. On a MoM basis, CPI is expected to witness minimal change as food and energy prices finally reflect stability.

The stability in sequential inflation trend is contributed by unchanged POL prices this month. To recall, despite Rs2.5/ltr and Rs5.45/ltr increase in MS and HSD PDL, respectively this month, lower ex-refinery prices assisted in retail POL product prices to remain at previous levels. Data also reflects no major change in food items but Onions (weight: 0.6%, +40% MoM). Though this would take YoY food inflation to 32%, the pace would be lower than previous month’s record of 36% YoY, with MoM increase expected at 70bp.

Core inflation pace is also expected to reduce to ~14.5% YoY, lower than previous month’s increase of ~17.5% YoY, and also slightly reducing 5MFY23 average to ~17.3% YoY (4MFY23: ~18% YoY).

FY23 CPI trend slowdown faces risk from energy costs

As highlighted in our previous reports, our workings suggest CPI would project receding YoY trend from hereon. Key risks to our average FY23 projections of 23% are increase in electricity and gas tariffs amid ongoing IMF program. Recent news flows suggest further revenue generation avenues to be tapped by the government as a result of tax targets being missed. In the scenario of limited avenues, government may also take the course of controlling expenditures via reduction in current energy subsidies. Impact of these may also magnify CPI through second-round effects. Nonetheless, the high base effect set in FY23 would result in single-digit inflation in the coming year.

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