Consumer inflation rate forecast to edge up in May

KARACHI: Pakistan’s consumer inflation is expected to edge up in May due to stable oil and higher food prices but it will not be enough to prompt a policy response from the central bank, analysts said on Friday.
They said there was a pick-up in food prices – a seasonal jump ahead of annual budget due in June – and that will probably be reflected on overall inflation.
Five analysts polled expect the consumer price index (CPI) to edge up by 0.9 percent and 1.1 percent in May.
“We believe monthly CPI inflation has most likely bottomed out in April,” said analyst Asir Zaffar at Optimus Capital Management.
“Despite continuation of high base till October 2015, we expect inflationary pressures to build up primarily due to upcoming month of Ramazan, fiscal slippages, budgetary taxation measures and energy tariffs rationalisation,” he added.
Zaffar said the CPI inflation is expected to clock in at 3.45 percent month on month for May.
However, “subdued oil prices and stable PKR/USD (Pak rupee/dollar) exchange rate will be instrumental in preventing a sharp rebound in inflation,” he said.
The low inflationary trend, following a fall in global oil prices, allowed the central bank to cut interest rate in successive monetary policy announcements from November 2014 onwards. Last week the bank slashed the policy rate for the fourth straight time to a 42-year low of 7 percent from 8 percent in a bid to spur economic growth.
Analyst said food inflation, comprising more than one-third of the weight of the CPI basket, is expected to register 1.9 percent MoM growth in May. Perishable items such as chicken, pulses and onions are expected to contribute to the MoM food inflation.
They expect the food index to increase by 2.3 percent YoY in May’15, versus decline of one percent YoY in Apr’15.
In addition, education Index (4 percent weightage in CPI), is expected to rise by 2.5 percent and 13.6 percent MoM and YoY, respectively.
Furthermore, they said a 6.3 percent YoY increase in house rent would contribute a significant 137bps (1.37 percent) to inflation reading of 3.30 percent YoY for May.
Analyst Umair Naseer at Topline Securities expects the month on month CPI inflation will record 1.19 percent growth. “This is mainly because of food prices hike,” Naseer said.
Mohsin Adhi, director at Alfa Adhi Securities agreed that food inflation is the root cause of a possible inflation shoot.
“Otherwise, developments, like progress on China-Pakistan Economic Corridor and a prospective Iran oil production upsurge, may keep the consumer inflation stable,” Adhi said.
Analyst Ahsan Mehanti at Arif Habib Limited said the CPI inflation may remain between 2.1 and 2.3 percent MoM in May.
“CPI is expected to show an uptick of 0.9 percent due to higher prices of onions/pulses/chicken and education,” Mehanti said.
Notably, the CPI rose 2.1 percent in April from March.
The SBP projects consumer price index inflation in the range of 4 to 5 percent for the whole year as compared to the original target of 8 percent. The inflation will be lowest during the past decade.
Analysts largely put weight behind the SBP’s projection. Some forecast this number below than that. Naseer of Topline Securities foresees yearly inflation in between 3.3 and 3.6 percent.