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The CPI inflation clocked at 8.4 percent in July 21. The headline number is falling. However, the monthly recording is higher than expected. It is the high base affect that is making the yearly number low. On monthly basis, the CPI grew by 1.34 percent. That growth needs to be abated. It is primarily food – perishable food items that is driving the monthly increase. The base effect is likely to remain favorable till November. Apart from food (mainly linked to domestic supply chain), the upside risks to inflation are currency depreciation and possible passing of increasing oil prices to the consumers.

Internationally, nearly all the commodities are on multi-year high and there are little signs of these coming down as such in the immediate term. The impact on Pakistan’s inflation is so far limited as the impact of rising oil prices has not yet been passed on to the consumers. Similarly, in many other commodities, the impact is partially absorbed by the local manufacturers’ suppliers – for example: coal and palm oil prices increase globally are higher than increase in cement and cooking oil prices in Pakistan.

Commodities around the world are burning hot. In Pakistan, the key linkage is through oil and gas. The increase is not really reflecting in domestic prices as government is absorbing the impact by compromising on taxes or by providing subsidies. The demand remained unchecked. But the impact is visible on current account through higher import bills. That is pushing currency downwards, and that can bring inflation across the board.

In July 21, food is the usual culprit. The sub index is increased by 1.75 percent MoM and the increase is 9.5 percent for perishable items. It’s the same story for tomatoes (up by 82% in a month) and Onion (up by 35%). The other notable increase is in vegetable ghee (6.7%) and cooking oil (6.6%). Here the international commodity prices are playing a role- palm oil prices are up by 50 percent in the last 12 months while ghee and oil prices are up by 30-33 percent. Now the currency impact will start appearing.

The second biggest increase is in the transport sector where prices are up by 4.1 percent on monthly basis and 11.4 percent on yearly basis. Here the key ingredient is petrol and diesel where the international price increase is absorbed by the government in the form of a loss in petroleum levy. That is putting fiscal in strain as it is eluding the target of Rs610 billion in PL this year. The indirect impact is on currency as unabated demand and higher imports are creating current account deficit.

The diversion between rural and urban inflation is thinning as both increased by 1.3 percent in July MoM and year or year increase is 8.7 percent and 8.0 percent respectively. As the rural is coming from higher base, hence its yearly number is shaping better. In terms of food the monthly increase is similar but urban yearly number is 1.4 percentage points higher at 9.4 percent.

The core inflation inched up a bit for urban at 6.9 percent in July as compared to 6.7 percent in the previous months. Rural core is down from 7.3 percent in June 21 to 6.9 percent in Jul-21. The good news is that the SPI inflation is reducing too. It is currently standing at 16.2 percent – still too high, and similar is the story for WPI which went down from 20.9 percent in June to 17.3 percent in July.

The overall inflation outlook is fine. SBP expects the FY22 inflation to fall in the range of 6-8 percent and it appears that the number will remain the same. Seeing the covid-19 fears, the SBP is keeping real rates slightly negative and the course of action would depend upon the current account and demand side inflationary pressures.

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