The CPI climbed to multiyear high– based on old base at 12.55 percent – highest since Jun-11. It was expected as the change in gas prices in Oct-18 had to have an impact on CPI (read “PBS owes a correction”, published Nov-18). On the new base, the story is similar but numbers are little low – CPI clocked at 11.4 percent in Sep-19. The 1QFY20 headline inflation stood at 10.08 percent versus 6.08 percent in 1QFY19. Let’s take the discussion forward based on new base.
The CPI is to come down to single digit in Oct-19, even with a similar monthly increase as in Sep-19 (0.76% monthly increase). But the number will move up to double digits in Nov-19 and will remain over 10 percent till Feb-19, before getting back to single digit in Mar-19, and it will start receding in months to come.
The full year average inflation is expected at 10-11 percent versus 11-12 percent forecast by SBP, 12 percent by ADB and 13 percent by IMF. The SBP expects the medium term inflation to be around 5-7 percent. And the inversion of yield curve is depicting that inflation is expected to tame in medium term. The model is showing 6-8 percent inflation in FY21.
The assumption is that currency will not depreciate significantly in quarters to come, and oil prices will remain on the lower side, given the global slowdown.
The key for stable currency is building of foreign exchange reserves; and for that debt flows from global capital market – both portfolio (hot money) and Euro/Sukkuk are important in next 6-9 months. That is to bring stability, and for it to sustain, much needed structural reforms (including documentation) are important.
Seeing all this, the chance of any rate cut is not in sight till Mar-20, and by Nov-20, 200-300 bps in cut is very much on the cards. That is enough on peeping into the future. The inflation in Sep-19 increased by 0.77 percent and higher yearly number is due to already explained high base effect. Even within monthly number, food inflation is the main culprit where poor administration in Punjab has some role to play. Poor governance at provincial level is undermining the stabilization policies run by federal economic team.
Food prices increased by 2.1 percent on monthly basis and the yearly increase stood at 15.8 percent. Items such as chicken (79.4%), onions (108.7%) and other at 30-50 percent increase have contributed to surge in inflation. In case of chicken prices have started to recede and will fall further (read “Chicken bites!!” published last month). Onion and other vegetable items’ price increase are due to ban on trade from India – and the cycle will reverse with higher local production after hike in prices.
The urban core inflation stood at 8.4 percent in Sep-19 versus 8.5 percent in August, and trimmed core increased to 9.3 percent versus 8.5 percent last month.
The trend and values in rural inflation are not much different. Based on core, the real interest rates are too high; but the SBP governor said in a recent interview to Business Recorder that since 95 percent of central banks use headline numbers for monetary policy decisions, the SBP uses the same.
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