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The headline CPI for February 2020 stood at 12.4 percent versus median forecast of 13.67 percent. This has surprised many in the market, but BR Research had called for headline inflation between 12-12.5percent, on Feb 28, 2020 (read: CPI may have peaked - but just).

Based on recent SPI numbers and fall in petroleum prices, March could surprise many with slight chances of inflation in single digit. If the commodity prices suppressed (Coronavirus fear) till monetary policy announcement, a token rate cannot be entirely ruled out. Invariably, one can safely bet on rate cut by May.

Back in January, majority of analysts were expecting rate cut earliest by July and most were betting on September or later. These are fluids time and expectations are becoming volatile. No one was expecting Coronavirus and the impact on inflation and trade deficit. The other reason was high CPI numbers in Jan which jolted PM Imran and his team. The singular focus of PM shifted towards controlling inflation. And it seems to be working.

Earlier, analysts were incorporating hike in energy prices based on quarterly adjustment as sought by the IMF.  Nobody saw the oil slide coming, as crude oil has seen its worst decline since 2008. Food prices hike was reeking with governance failure. Analysts were not expecting a sharp reduction. The subtle element is of fuel price adjustment, which was not passed on in February bills. Electricity tariffs are down by 13.5 percent on monthly basis. All these have contributed to decline in inflation in February. March inflation could well be negative on monthly basis, if fuel price adjustment continues to be deferred.

The biggest decline in is in food group which is down by 2 percent on monthly basis and it has contributed 70 bps in CPI decline. The yearly increase is still as high as 18.4 percent. Within it, perishable food items fell by 14.2 percent from Jan-20 numbers. Perishable items have historically oscillated like this. For instance, tomatoes are down by 60 percent in a month.

Still there is more room for adjustments. The perishable food yearly increase stood at 32 percent. For instance, onion price increase on yearly basis stood at 103 percent. Pulses, potatoes and fresh vegetables are not far behind. For example, in Jan20, tomatoes price yearly price increase was 157 percent for urban and over 200 percent for rural. Now it is reverting to normal. Signs of such reversal are not yet visible in onion, but it should be a matter of time. SPI based weekly data suggests that March inflation could well be in negative, on month-on-month basis.

The surprise element is fall in housing and utilities sub index by 2.45 percent on monthly basis. The usual fuel price adjustment is halted. It is linked to international oil prices and is adjusted with three-month lag. Impact of Nov19 was supposed to be in Feb20, but it didn’t happen. The government may well wait for the oil prices to have an impact on future FPAs, so as to net-off the impact over time.

The core urban inflation inched up to 8 percent, and for rural it is at 9.4 percent. It is not much of a worry at this point as inflationary pressures were emanating from supply side factors such as food, fuel and energy.  Now these are under control due to better administration lately and temporarily freezing of energy prices hike. This implies the second round of supply side pressure on wages and other factors contributing to core might not appear. SBP suggested in last MPS that such signs of second round of inflation are not significant.

The energy price issue was the bone of contention with the IMF. Now with staff level agreement reached, the buzz is that the price increase has been delayed till the end of fiscal year. The idea is to tame the inflation before increasing energy prices. Luck is on the government’s side as low oil prices are expected to be around. That has let the government to partially pass on the impact of decline to consumers, while for rest taxes were increased to plug in the revenue gap.

If the oil prices remain low, this will give much needed breathing space. The bond yields are falling. If the global demand remains suppressed till the third week of March, there could be case of doves dominating in monetary policy committee. In Nov19, there were two votes for cut. The number could have increased to three in Jan-20. If the rate cut is too soon for March, the hawks may well change the stance by May.