Inflation seen at highest level in a decade in June

KARACHI: Consumer price inflation likely sped up to over a decade high in June on runaway food and energy prices and currency devaluation, a group of analysts said on Wednesday, reinforcing expectations that the central bank will raise its key interest rate for the sixth consecutive time next month.

Analysts suggested inflation, as measured by the consumer price index (CPI), will rise in the range of 18.1-19.5 percent in June on an annual basis, from 13.8 percent in May. That would be the highest reading since 2009.

They said June CPI to rise almost 20 percent based on recent changes in prices of fuel and other commodities and “the current situation has been compared with the 2008 situation following the global financial crisis”.

The government had twice slashed unfunded fuel subsidies to control fiscal deficit and secure International Monetary Fund (IMF) bailout programme since last week of May. It raised petroleum products prices by Rs60/liter and had also increased electricity tariffs. The government has so far passed on the subsidy burden to the masses by announcing more than Rs84/litre (56 percent) increase in petrol prices and Rs119/litre (82 percent) increase in HSD prices in almost 4 weeks.

The SBP has cumulatively increased policy rate by 675bps during last one year and by 400bps in 2022 to date. This was the highest policy rate increase after 2008 when policy rate was raised by 500bps in a calendar year.

Analyst Umair Naseer at Topline Securities said the country would witness a streak of more than 15 percent inflation for the next 4-6 months, peaking at 21 percent in August 2022.

“For June 2022, CPI inflation is likely to remain in the range of 18.5 percent-19.5 percent on YoY basis (3.9 percent-4.8 percent on MoM basis) as per our estimates.”

Naseer said in the fiscal year 2023, average inflation would likely be around 15.5 percent-16.5 percent compared to Pakistan’s long-term average inflation of 8 percent. He expects FY24 CPI to clock in at 10 percent.

The key assumptions behind these projections included increase in base electricity tariff by Rs7.9/unit or 45 percent in July 2022; 45 percent hike in gas tariff in July 2022; Arab light oil price assumption of $100/bbl in FY23 and $87/bbl in FY24; and 5 percent annual devaluation in FY23 and FY24.

“Current situation of rising CPI trend is also somewhat similar to what was seen during 2010 where inflation remained at around 15 percent for four consecutive months from September 2010 to December 2010 with average FY11 inflation clocking at 14 percent,” Naseer added.

During the 2008 period, prices remained elevated for a prolonged period of time, as inflation stood in excess of 15 percent for 13-months from April 2008 to April 2009. In October 2008, it peaked at 25 percent where FY09 average inflation stood at 21 percent.

Analyst Arslan Siddiqui of Optimus said inflation would reach at over a decade high in June 2022 and the CPI is estimated to clock in at 18.1 percent YoY.

“On a sequential basis, CPI was estimated to sharply surge by 3.5 percent mainly led by jump in motor fuel prices by 40.6 percent, continued food inflation of 3.1 percent MoM, and higher electricity prices,” Siddiqui said. “Along with elevated energy prices, rupee devaluation and commodity prices.”

Core inflation was estimated to increase to 11.1 percent YoY with MoM uptick of 1.0 percent in CPI.

Siddiqui noted that food inflation, which weighed 34.6 percent in the inflation basket, had risen for the fifth consecutive time. It increased 3.1 percent MoM, mainly due to 8.4 percent hike in prices of fresh milk, 6.1 percent increase in cooking oil, 22.3 percent spike in egg prices, and increase of 30.8, 11.5, 9.6, and 9.8 percent uptick in prices of potatoes, tomatoes, pulses, and rice, respectively.

However, wheat and wheat flour prices were expected to dip MoM amid downward price trend in past few weeks. “We believe, increase in HSD prices by Rs60/litre and elevated import parity prices are the primary reasons of food inflation,” the analyst said.

Amreen Soorani of JS Global expects June 2022 CPI to clock in at 19.2 percent, with MoM increase at 4.53 percent; substantially higher than 11MFY22 average CPI of 11.26 percent and May 2022 reading of 13.76 percent, owing to higher fuel and food prices.