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JS Securities Limited – JS Research (September 19, 2022)

Karachi, September 19, 2022 (PPI-OT): Sep-22: CPI expected at 26% over higher food inflation
We expect another month of 25%+ YoY CPI reading, where we expect CPI for Sep-2022 to clock in at 26.4%. While this would be lower than Aug-2022’s readings of 27.3%, we expect inflation trend to remain on the higher side owing to higher food inflation and ongoing second-round impacts.
Going forward, the continued weakness in PKR, WPI reaching 41.2% and aftermath of floods are likely to maintain pressure on national CPI.

To recall, in the last devastating floods witnessed during 2010, food inflation soared from 12.8% in Jul-2010 to 21.2% in two months, led by 2 +5% MoM jumps.

Sep-2022: Food inflation to worsen the burden

We expect another month of 25%+ YoY CPI reading, where we expect CPI for Sep- 2022 to clock in at 26.4%. While this would be lower than Aug-2022’s readings of 27.3%, we expect inflation trend to remain on the higher side owing to higher food inflation and ongoing second-round impacts. On a MoM basis, CPI is expected to witness an uptick of 1.4%. Food inflation is expected to continue to remain on an upward trajectory, with 275bp MoM increase in Sep-2022, led by further sharp rise in tomato prices in the monsoon season.

For perspective, tomato prices have jumped by 100% in two months, out of which +40% has been recorded in Sep-2022. Egg prices have jumped 24% since Jul-2022, from which 15% has been observed this month. Also, heavy-weight Milk and Wheat prices also witnessed a ~4%/8% MoM uptick respectively, cumulatively contributing ~150bp in the expected CPI growth.

FY23 CPI to face pressures on multiple fronts

The more than 20% decline in ex-refinery prices of POL products have been a window of opportunity for the government to increase levies without further burdening inflation readings. Having said that, the continued weakness in PKR, WPI reaching to 41.2% and aftermath of floods are likely to maintain pressure on national CPI in the coming months. These are also the key risks to our FY23 average CPI assumption of 21%. To recall, in the last devastating floods witnessed during 2010, food inflation soared from 12.8% in Jul-2010 to 21.2% in two months, led by 2 +5% MoM jumps.

Moreover, among the top contributing constituents of the WPI basket are also milk (11.5% weight) and cotton and fibre crops (10.6% weight), which are expected to face supply constraints post damage of wheat stocks, cotton, rice and vegetable crops and livestock in the recent flash floods.

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