Having hit a low of 5.7 percent in Jan 2021, headline inflation is expectedly up – 9.1 percent in Mar 2021. The rising trend is likely to continue till June. Headline inflation in the next quarter is likely to be north of 10 percent, and thereafter it will come down. That is base effect coming into play.
A better indicator is to see the 12-moving average, which is on a decline. It is at 8.4 percent as compared to 11.6 percent in the same period last year. The number is on southward journey since Jan-20. But it seems that the 12M moving average is likely to stagnate around 8 percent in the next 6-9 months, if not moving up.
In March, the headline number increased by 0.36 percent month-on-month. Food prices are up by 1.75 percent while the second biggest item in the basket – housing and utilities, is down by 1.65 percent to partially nullify the impact of food increase. In between, clothing, health, restaurants and furnishing witnessed a higher increase. Transport index declined as well, as the government is letting go of additional tax revenue on petroleum.
The gap between rural and urban inflation which thinned significantly in the last few months – from 4.5 percent in Nov20 to 0.2 percent in Feb21 is on the rise again – at 0.8 percent in Mar21. The reason for thinning the gap was decline in food prices – as the weight of food is higher in rural and the increase was higher, during Jan-Feb.
Food price needle is moving up again by 1.75 percent on monthly basis in Mar21– 1.7 percent in urban and 1.5 percent in rural. The usual suspect – chicken, eggs, fruits, potatoes, sugar, tomatoes etc are moving up. On yearly basis, the increase in chicken is north of 60 percent, eggs are in forties and non-perishable commodities – wheat and sugar are up by 35 percent and 23 percent, respectively.
The global supply chain disruption and international commodity prices have an impact on the inflation. Prices of cotton cloth, vehicle accessories, and plastic products increased by over 1 percent in the last month. That said, core inflation is not moving up yet at a worrying pace – 6.3 percent for urban and 7.3 percent for rural. The key is to closely watch the salary negotiations with the government employees in this budget as this would have an impact on private sector wages and could trigger a wage-price spiral.
The monthly electricity adjustment came to rescue with a decline of 8 percent, and the transport services are down by 3 percent. This has resulted in the decline of house rent and utility index. There will be some uptick in the sub-index in April. Recent reduction in oil prices and currency appreciation in the past two months will keep some part of inflation in check.
The story of food inflation will likely continue with the holy month of Ramadan. There are supply side pressures that persist. The sugar industry that there is a slight shortfall in production versus national consumption – while no cheap imports from India are in sight. It is imperative to see how the new wheat crop turns up.
Seeing all those factors, the yield curve is too steep – indicating that the market is expecting inflation to remain high going forward and there would be some pressure on the interest rates to move up. But don’t get bogged by double digit inflation in the next quarter as that is due to base effect and SBP has clearly mentioned that any increase in policy rate would be “measured and gradual to slowly take from negative to marginal positive real interest rates”.