The inflation was expected to remain high, and still, it beat all expectations. Market was anticipating 18-20 percent. SBP was expecting it to be 20 percent. The actual number came at 21.3 percent in June 22 – highest ever since Dec 2008. The monthly increase is at 6.3 percent - by far the highest since the 1970s. The full year FY22 inflation is up by 12.1 percent – highest since FY11. The FY23 expected average inflation is beyond 15 percent.
High inflation is a global phenomenon with numbers in developed world running at 30-40 years high. The overall outlook of the world is to reach the highest inflation since 1970s. In Pakistan, during 1973-74 and 1974-75 headline inflation was 30 percent and 27 percent respectively. The second highest inflation cycle was in 2008-09 when the CPI peaked at 21 percent. Let’s see how the numbers turn up in 2022-23. It all depends upon the outlook of global commodity prices. Whatever the actual number would be, it is going to a very tough year.
June was not an easy month. The political ice brokeas the government started increasing petroleum prices after a lull of a few months. The increase was too much for any single month, and remains the prime reason for the hike in inflation. Motor fuel prices increased by 37 percent in a month. Then, electricity charges are up by 52 percent. And rest is falling in line.
The highest increase is seen in the Wholesale Price Index (WPI) recorded at 39 percent in June. WPI in FY22 (at 25%) is the highest since FY74 when the index rose by 33 percent. The recent peak was in FY11 when the number was 23 percent. On the WPI basis, Pakistan inflation is the highest in 48 years.
Whatever lens one uses, inflation is hurting like anything. The increase in fuel prices during June has cascaded into the increase in food prices which are up by 5.5 percent in a month and the yearly increase is at 26 percent in June. And the price increase due to upward revision in the fuel prices perhaps not yet fully passed. Expect some more increase in food prices during July. This is visible from the increase in SPI in the last two weeks, and more is yet to come.
It's not that just perishable food prices are increasing. The hike is in the none—perishable prices as well. Potatoes, eggs, pulses, mustard oil and ghee, wheat, rice, and basin all have witnessed double digit monthly increase during June. Not much far behind is milk – whose price is increased by 8.2 percent in June and its weight is highest in the food group and has the largest impact on overall inflation.
The overall inflation – including food—is hurting rural areas more. The rural CPI is up 23.6 percent as compared to 19.8percent for urban. The rural food inflation is up by 27 percent while urban food is up by 24 percent. The rural inflation is ahead in the non-food inflation as well – up by 21.7 percent versus 17.3 percent for urban in June.
The core inflation that excludes food and energy prices is becoming uncomfortably high too. The core inflation increased to 12.3 percent in June 22- highest since August 2009. The urban core is at 11.6 percent while the rural core is standing at 13.5 percent. The trimmed core is showing an even more dangerous trend – up by 16.7 percent for urban and 19.1 percent for rural. Yes, the rural trimmed core is almost at 20 percent. Not pretty at all.
The question is, has inflation peaked yet? The answer is in the movement of global commodity prices and which has an impact on the currency which also holds bearing on inflation.
The next question is how SBP would react to this growing inflation in its upcoming monetary policy on 7th July (Thursday). According to a survey conducted by the Topline Securities, majority of the participants expect the policy rate to increase by 100-150 bps from existing 13.75 percent. It would be a difficult decision by the SBP. As for the past few months, SBP has remained behind the curve, as the market rates remained higher than the policy rate and SBP has been found chasing the market. The secondary market rates are depicting an increase of 100 bps. Let’s see how much increase would the SBParrive at with a forward guidance in such a fluid situation.