The headline inflation clocked at 10.9 percent in May 2021 as compared to 11.1 percent last month. The 11MFY21 number stood at 8.8 percent and the full year average is likely to be at 9-9.1 percent – slightly higher than SBP’s expectation of 7-9 percent. The real interest rates on forward basis were kept at minus 2 percent throughout FY21, indicative of an accommodative monetary policy.
On monthly basis, prices are up 0.1 percent in May 2021. This is lower than what market was expecting based on the recent surge in food prices recorded in weekly sensitive price index (SPI). Nonetheless, food remains the main trigger of inflation in May – sub index is up by 0.87 percent. On yearly basis, food inflation is up by 14.8 percent. Non-perishable items are primarily driving food prices – up by 18.2 percent on yearly basis.
Chicken is becoming dearer every month - up 16.9 percent in a month. On yearly basis, chicken prices are up by 57.6 percent. The other concerning item is wheat flour – prices are up by 9.75 percent in a month and 29.9 percent YoY. This is even though the country is supposedly having the highest ever production this year. The math is not adding up.
Much of food prices upward revision this year is due to rising global food commodity index. Last two years, the impact of currency depreciation was keeping prices higher. In FY21, prices rallied due to global supply chain disruptions featuring commodities such as wheat, maize, soyabeans, sugar, palm oil and many others. The impact is visible in food prices at home. Next year, international prices may revise down to arrest the price increase at home.
The house rent index was down 1.2 percent from the previous month due to downward revision in electricity charges. Transport inflation is up by 14 percent year-on-year due to upward movement in petroleum prices earlier this fiscal. However, the recent surge in oil prices is not entirely passed on to the consumers, keeping the uptick in monthly transport prices in check.
The gap between urban and rural inflation is thinning, down from 4.5 percentage points to almost nothing for May 2021. Lately, urban food inflation has been higher than rural. This depicts that the gaps in food value chain are showing teeth – for the past four months, the monthly growth in food prices is consistently higher than rural. However, on the non-food inflation (mainly core), rural prices are growing at a higher pace. Last year, rural food prices were higher and now better income levels in rural areas are impacting the demand.
The core inflation has come down a bit as well in May – standing at 6.8 percent for urban (April at 7%) and 7.6 percent for rural (7.7% in April). Although, core inflation is much less than headline, it has recently changed direction in the last months. This is depicting in the trimmed core inflation – urban at 10 percent and rural at 10.3 percent. Going forward, with revision in wage prices and thinning of output gap, there could be put more pressure on the core.
On 12M moving averages, the headline inflation is at 8.8 percent and core at 6.7 percent. The trend is largely on a decline, as headline was in double digits prior to Oct-20. In the last two months, moving averages are inching up as the low base effect is keeping headline inflation up in the Mar-June quarter.
Headline for both April and May are in double digits and the trend is likely to continue in June. In July, the high base of last year (July 20 monthly inflation was 2.5%) will come in play and that would tame the headline inflation in 1HFY22. However, there would be some resurgence of inflation due to wage price revision and economic demand picking up – if output gap turns positive.
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