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Thursday March 28, 2024

August consumer inflation expected to ease at 8.2 percent as food prices fall

By Our Correspondent
September 01, 2020

KARACHI: Annual consumer price inflation is expected to decelerate at a little over 8 percent for August from 9.3 percent in July as food prices are showing downtrend, analysts said on Monday.

“Food prices have started to decline after Eid, while prices of few essential commodities such as wheat flour, sugar and rice have increased during the month,” said Noman Ahmed, analyst at Insight Securities. “We expect urban inflation to arrive at 6.8 percent year-on-year and rural at 10.2 percent year-on-year. Similarly, rural and urban inflation is expected to inch up 0.5 and 0.6 percent month-on-month, respectively.”

Analyst Mustafa Mustansir at Taurus Securities expected prices for the housing and utilities group to soar owing to an increase in electricity prices along with 6.2 percent increase in prices for the miscellaneous group due to the effect of rising fuel and precious metals prices in August over July.

“Considering the government mulling further increase in fuel prices, we expect inflationary pressures to continue next month as well,” said Mustansir. “However, FY21 average inflation is expected at 7.92 percent.”

In FY2020, the average inflation was recorded at 10.74 percent, while it peaked to 14.56 percent year-on-year in January.

Consumer inflation accelerated faster than expected in July as economic activity gradually resumed with the easing of coronavirus lockdowns, driving food and fuel prices higher.

Analysts expect the central bank to keep policy rate unchanged in September after sharply axing it at 7 percent back to back in the previous policies, but the decision also depends on August readings too.

“We expect the SBP will maintain status quo stance in the upcoming monetary policy committee meeting, which is expected to be held in mid-September,” said Ahmed. “Both real and external sectors have performed relatively well during the pandemic.”

Ahmed said real interest rate is hovering at negative 1.14 percent, which is well below a historical average of 1.5 to 2 percent. The economy is witnessing a V-shaped recovery post lockdown, as real sectors have started to pick up, while external sectors, including exports/imports and remittances, also provided a much-needed relief to the country’s current account. A current account surplus of $424 million was reported in July, which is well supported by recovery in exports and remittances, which increased 20 and 12 percent, respectively.

“Therefore, we don’t expect any further need for any policy rate adjustment and SBP is likely to follow a wait-and-see approach instead of reacting proactively,” said Ahmed. “CPI is 2HFY21 is expected to fall in the region of 8.3 percent… possible rate hike of 25-50 percent in November cannot be ruled out.”

Consumer inflation is expected to rise by 0.56 percent month-on-month in August due mainly to rise in the motor fuel and electricity index, which has offset higher base effect to some extent.

Rise in electricity tariff on account of fuel adjustment relating to earlier months resulted in a rise of 9.8 percent in electricity index having weight of 4.14 percent in overall CPI. While petrol and diesel prices have also gone up by 3.9 and 5 percent during the month.

Food prices remained mixed in August. Chicken, tomato and pulses prices dropped 35.3, 28.3 and 2.26 percent, respectively. Prices of wheat flour, rice, fresh milk, potatoes and onions surged 4.5, 1.6, 6.8 and 11.13 percent, respectively.