CPI roundup

The headline inflation is on the rise again, and the impact of recent round of currency depreciation is yet to be reflected. CPI clocked at 9 percent in September and on monthly basis, the number is up by 2.1 percent. The increase is primarily attributed to higher food and energy prices.

The headline averaged 1QFY22 at 8.6 percent while the SPI and WPI are well in double digits at 16.3 percent and 18 percent, respectively. Moreover, going forward, due to currency adjustment and growing international commodity prices, inflation pressures are likely to persist.

The main culprit for the headline number is higher food inflation – which on monthly basis increased by 4.0 percent in urban markets, and 4.1 percent in rural. The higher increase is in non-perishable items, which tend to be sticky. Energy prices are hurting due to increase in global oil, gas, and coal prices. Electricity charges are up by 11.5 percent in a month due to fuel adjustment. Fuel adjustment is also likely to stay high in coming months.

Within food, chicken prices are on the rise again– up by a whopping 34.4 percent in a month on national basis. BR Research’s agricultural coverage had previously forecast that the increase in Day Old Chick prices have been on a rise since mid-August, and were eventually going to reflect into broiler prices with a 4-5 weeks lag. (For details read “Broiler: no stopping now?”, published on 7th September, 2021).

Similarly, the increase in wheat – 7.3 percent and wheat flour – 9.7 percent on monthly basis was well-expected, and a result of misplaced government-imposed price floors. The upward revision by 32 percent in wheat issue price by Food department is now fully reflecting itself in retail level prices. Although wholesale prices indicate that market players had already priced in the forthcoming rise when support price was increased earlier during the year. (For details read “Wheat: no fun in saying told you so” and “Flour prices – trouble beckons?” both published last month), by BR Research).

This is followed by the second most heavy weight housing and utilities sub-index – the monthly increase is at 1.6 percent and yearly inflation at 8.9 percent. The higher inflation in September is due to higher electricity charges – up by 11.4 percent which is due to fuel adjustment. Expect more increase in coming months.

If the government increases base price as negotiations with the IMF are starting this week, that could send inflation even higher. Then the house rental price quarterly recording is also due in October. Seeing how real estate prices have jumped in the last year or so and recent increase in construction inputs, house rents should be under inflationary pressure, and anecdotes suggest sharp rise in house rents.

The third sub-index of higher inflation is of transport – which is up by 1.5 percent MoM and 9.7 percent YoY. Again, the culprit is high energy commodity prices. The motor fuel prices increased by 1.7 percent on monthly basis. And it is just the start. Expect more adjustments in the coming months as forecast of short-term oil prices is high. Moreover, currency adjustment is not helping either.

Then there are price pressures on number of other items such as plastic and plastic products, wash soaps and detergents, motor vehicle accessories and woolen cloth. There would be more items in coming months where the prices have started appearing high.

Inflation expectations of both households and businesses have once again moved up. Given SBP’s earlier inflation estimate for FY22 is now threatened, expect central bank to tighten the belt to bring medium-term inflation back in target range of 5-7 percent.