May CPI

The fall in Mays inflation number reaffirms the view that it is not easy being a central banker.
CPI inflation was recorded at 5.13 percent in May, its lowest tally since the index was rebased in 2011. The 11-month average inflation is now at 7.51 percent, which means that full-year number will be well below the target of 9.5 percent.
Slowdown in month-on-month number to 0.5 percent from 1.1 percent in April along with a consistent slide in wholesale price inflation (WPI) is also promising. Coming down from 6.8 percent in April, year-on-year WPI stood at 4.1 percent in May, its lowest tick since April 2012, implying lower pressure on CPI in the months to come.
Even better is the fact that non-food-non-energy inflation slipped to 8.1 percent year-on-year down from 8.7 percent in April, whereas year-on-year trimmed inflation fell even further to 6.7 percent in May from 7.6 percent in the month before. This strengthens the case for resumption in the easing of monetary policy, especially considering that lowering interest rate was a part of PML-Ns manifesto.
Countering this rosy picture are two main thorns: (a) the rise of government borrowing, and (b) the concerns over balance of payments.
Fears abound that deficit financing by the government will stoke inflationary pressures. In the absence of foreign assistance and other inflows, monetary growth is seen rising "as the government will need about Rs700billion for budgetary support," according to calculations by InvestCap Securities.
The external situation is also not sanguine. In its last monetary policy statement, the central bank said that balance of payments demand vigilance. Low financial inflows and high debt payments were cited as key concerns in April and the situation appears no different today.
On this front, news is making rounds that there will be support from Saudi Arabia in one form or another. But nothing is concrete as yet. On the pricing front, however, the rationalising of gas tariffs along with the spill over impact of likely hike in electricity rates are two major odds against the rate cut.
Which factor offsets what is a tricky affair; one which is probably making the lives of central bankers miserable at the moment, however, since some of the odds working against the rate cut are more like future expectations than a fact as of now, some contrarians in the market are anticipating a rate cut.
"Looking at Mays inflation, especially the fall in core number, suggests that the PML-N government will influence a rate cut for its political imperatives," one treasury market participant told BR Research. "If they have any chance, it is now, because if they push for reforms, an inflationary Pandoras Box will open - making it extremely difficult to lower the rates."

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May CPI - Key items

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                           YoY (%)     MoM (%)

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General                       5.13        0.51

Food & bev                    6.22        1.21

Non-persishable               5.33        0.34

Perishable                   11.46        6.31

Clothing & footwear          12.57        0.82

Housing, water, electric      0.83           0

Transport                    -0.22       -1.16

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Source: PBS