National headline inflation expectedly cooled off from last month – clocking in at 26.89 percent year-on-year, lowest since December 2022. The 4MFY24 headline inflation at 28.5 percent is still higher by 3 percentage points from the same period last year. The high base effect is lost on no one as this comes off a considerably high base of 26.6 percent from October 2022. General headline inflation has now stayed way clear of 20 percent for 17 straight months – and that is not likely to reverse anytime soon.
While headline is on a very clear trajectory south – core inflation tells a different tale. Months of inflationary pressures built in through energy prices and currency depreciation are now reflected in core inflation as second round impact unravels. Core inflation is much more pronounced in rural settings, just slightly under the all-time high reported last month. The urban basket composition with significantly higher weightage of house rent than rural basket –is the leading reason why urban core inflation stays much lower than rural.
At c. 27 percent year-on-year, both urban and rural food inflation indices are the lowest in 16 and 17 months, respectively – that is around the same time when general breached the 20 percent mark in June 2022. Outside of the continuation of the relentless increase in condiments and spice prices, the food sub-index was largely driven by increase in perishable food prices – most of which is seasonal. Grains, cooking oil, and sugar have come down from the respective all-time highs seen in the last two to three months.
The biggest element of surprise is thrown by fresh milk prices – which went down nearly 2 percent month-on-month in urban settings. Now, milk has the highest weightage in the food basket in both urban and rural indices – and often leads the way in terms of weighted contribution. The month-on-month drop in milk prices is the highest ever, if one disregards the only time, it fell higher during the peak of Covid lockdown in April 2020. Whether this is a result of administrative actions or signs of demand destruction – is not fully known at this point – but is well and truly a very rare moment in CPI documented history.
The big reprieve came from motor fuel charges – as much appreciated PKR coupled with downward trend in international crude prices for the reference period allowed authorities to substantially cut retail fuel prices, without having to let go of revenues. The month-on-month drop in fuel prices at 4 percent is more pronounced in urban CPI than no change in rural CPI – largely due to higher weight of MS petrol in urban where the cut was significant – versus a smaller drop in HSD prices, which have a bigger share in rural CPI basket.
The electricity tariff treatment by the PBS continues to defy ground reality. October 2023 reading shows a mere 8 percent increase month-on-month. The increase in protected category alone is close to 20 percent month-on-month as new quarterly adjustment of Rs3.2.unit replaces the previous lower QTA. The increase in the first 300 units in the unprotected category comes close to 8 percent month-on-month. Given two-third consumers falling within the first 300 units (protected and unprotected combined), an 8 percent month-on-month increase is again on the lower side.
Gas prices are slated to go up considerably for all consumer categories. While the direct impact in CPI will be significant (if treated right), it is the increase in commercial and industrial tariffs that could lead to increase in WPI index going forward. Crude oil prices once again hold the key in determining how soon will the plateau be reached. Assuming no exceptional circumstances, things should be well within the central bank’s target, come the second half.
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