Inflation expected to come down to 26% in October: brokerage house

Propelled by lower food prices, Consumer Price Index (CPI)-based inflation in October is expected to hit 26.4%, lower than the 31.4% recorded in September, said brokerage house JS Global on Monday.

“We preview CPI for Oct-2023, where we expect the headline inflation pace to slowdown to 70bps month-on-month (MoM), much lower than last 12-month average of ~230bp MoM. This would take CPI for Oct-2023 to 26.4% - the lowest inflation pace since January 2023,” said JS Global.

On a monthly basis, the slowdown is expected on the back of a drop in petroleum product prices, which likely trickled down to a dip in food prices – contrary to historical practice, it said.

“Data suggests food inflation (~35% weight) to drop by 89bp MoM. The same, however, is not expected to replicate under the restaurant segment (~7% weight), which is expected to report a 145bps MoM increase in inflation.

“Moreover, the breather in food prices is also expected to be waned by the quarterly house rent adjustment and MoM uptick in electricity prices, leading to a 4.7% MoM increase in the housing, water, electricity, gas and fuels segment (~23% weight). … excluding impact of recent ~8% POL product price cut,” the brokerage house said.

The brokerage house projected the next 12 months’ CPI average at 19%, reflecting a positive real effective interest rate of 300bps, bearing the absence of negative CPI surprises.

Meanwhile, it highlighted that the base effect has been complemented by the recent appreciation in the Pakistani rupee against the US dollar and some respite in international oil prices.

“With the impact of the higher base effect becoming more pronounced in the coming months, especially beyond January 2024, some quarters of the market are now expecting an earlier than previously anticipated start of the monetary easing cycle,” noted JS Global.

“While our base case expectations of the first cut to be announced is in March 2024, when real effective interest rates would turn positive on spot basis, an earlier cut cannot be ruled out,” it said.

JS Global premised the possibility of an earlier cut on one of the State Bank of Pakistan’s key considerations on the monetary policy being the forward-looking CPI.