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The headline inflation in May stood at 8.22 percent, in line with the market expectation. The 11MFY20 average inflation is at 10.94 percent (the full year number could be a little lower than SBP’s projection of 11-12%). CPI may stand around 8 percent in June, and thereafter, a downward trajectory due to previous year high base effect. In a few months, inflation may hover around 4-6 percent.

Some say, SBP should be proactive in easing the policy like it was aggressive in tightening last year based on expected inflation. The wise option is to hold the horses and let the numbers come before committing to further easing. There are some risks. The currency is in under pressure for past few days; and excessive easing could have an adverse impact on currency. Already the FE25 deposits have increased by $500 million since second week of March. The other element is that electricity and petroleum prices ought to revise up and that would have inflation consequences. It is best to wait for IMF new conditions and budget (if there are any new taxes).

In May, the CPI increased by 0.32 percent on monthly basis. The ease in petroleum prices is more than offset by the hike in food prices. In May, the government reduced the petrol and diesel prices by 15-25 percent. The transport sub sector fell by 6.45 percent on monthly basis and impacted the CPI by -0.39 percent. The petrol price is reduced further by 8.6 percent in June while HSD is unchanged. Petroleum prices are ought to increase in months to come.

There is a chance of uptick in petrol prices by Mid-June; as at current ex-refinery prices, there is no rationale for refineries to operate or oil marketing companies to import. The government had to lower the prices due to obscure OGRA rules. The laws allow to change prices every 15 days. They will have to increase ex-refinery prices; the consumer prices can be kept unchanged by reducing the petroleum levy (PL). However, it is not advisable. Government has to have higher revenues to manage deficit. If no new taxes are deployed, then the potential on petroleum prices have to be fully utilized.

Then there is a strong case (by IMF) on revising up the electricity prices. In pre-COVID times, the IMF 2nd review was delayed because of the issue of electricity prices and on resolution of circular debt. Now the IMFs 2nd/3rd reviews are in process and there is no escape from electricity mess.

These energy prices revision and any new taxes in budget could change the inflation forecast. Nonetheless, food items play an anchoring role of inflation in Pakistan. Hopefully, there will be less pressure of food inflation in the next year. In May, the food prices moved up and have eaten up the benefit of lower petroleum prices. The food sub index is up by 1.6 percent and its impact on CPI is 0.56 percent. On yearly basis, it is still in double digits at 12.24 percent. This suggest that base effect will play a role in coming months.

Chicken prices are up by 41 percent on monthly basis in urban CPI. This is despite the slowdown in demand due to lockdown. One reason for hike is that earlier chicken prices came down too much (pre-COVID) and the other is due to short chicken production cycle (6-8 weeks). In the start of lockdown, chicken producers dumped the one-day old chicken as there was seeing no demand. Now with demand slowly picking up, there is shortage of supply. This will normalize soon.

The fruit prices increased by 10 percent and within it bananas are up by 30 percent. This is due to Ramazan demand. This increase might not sustain. Apart from that, potatoes prices are up by 32 percent. This will come down in a few months; but by that time onions or tomatoes will move up. That is how the food prices move. But the high base effect will keep the yearly food inflation number low in the upcoming fiscal year.

The other element is milk prices which are up by 4.6 percent. Milk and dairy products have 26 percent weight in food inflation. The retail price is up despite a fall in farm gate prices. The milk price pressure was building for some time. The input prices have moved up; but the retail prices were largely unchanged. Now the supply chain is normalizing.

The price increase could be to build up the case of import of powdered milk as big companies are lobbying for lowering import duty on powder. For keeping food inflation in check, milk and wheat prices are the key. If they do not move up much, food prices will remain in control.

There is no significant change in the other sectors. The urban core inflation is down to 6.3 percent and the rural core stood at 8.4 percent. SPI has inched up to 11 percent in May (from 9.3% in April). The Ramzan effects and food prices movement explain this uptick, as on monthly basis SPI is up by 2.2 percent. The good news is that wholesale price index (WPI) yearly inflation is down to 1.5 percent in May. The number was 12.6 percent till Feb. This sharp decline is suggesting ease in retail prices going forward.