Inflation to cross 30% as rupee depreciation, petrol prices bite: report

Market experts have warned that inflation is expected to cross 30% year-on-year, a development that would add to the misery of the already downtrodden masses, amid sharp depreciation of the Pakistani rupee and massive increase in prices of petroleum products.

“A sharp rupee devaluation in the last two trading sessions followed by hike in prices of petroleum products over the weekend have raised concerns over impact of the same on CPI,” said JS Global, a brokerage house, in a note on Monday.

“Under the first scenario, assuming bulk of immediate PKR adjustment against US$ has materialised and expected hike in energy costs also follows soon, we expect sharp spike in MoM CPI in next 2 months, followed by softer MoM readings in subsequent months. This should result in FY23 average CPI inching marginally higher to 27% from 26%.

Pakistan’s headline inflation clocks in at 24.5% in December

“In case further devaluation materializes soon and / or energy price hikes are higher than our expectation of 40% gas and 20% electricity price hikes, then we would see upside risk to our CPI estimates,” said the brokerage house.

“(However) in any scenario, given the bulk adjustment in currency, a 30% YoY CPI reading now seems inevitable. This is broadly led by direct impact on ~20% of the CPI basket accumulated by fuel, edible oil and items for which Pakistan is a net importer,” it added.

The brokerage house’s note came before rupee depreciation on Monday, which was another 2.7% until the filing of this report.

Last week, the government in its bid to appease the International Monetary Fund (IMF) decided to free-float the exchange rate that resulted in massive depreciation of the rupee, which lost 12.5% of its value during the previous week, but the bulk of the fall came in the last two sessions – on Thursday and Friday.

Meanwhile, the government moved to pass on the impact of rupee’s drastic fall and announced an increase in the prices of petroleum products by Rs35 (petrol, diesel) and Rs 18 per litre (kerosene oil, light diesel) with the decision to immediately implement the increase few minutes after the announcement by Finance Minister Ishaq Dar on Sunday.