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The CPI clocked at 10.24 percent in March 20. This is in line with consensus estimate. The impact of COVID-19 (depressed commodity prices and plummeted demand) is yet to translate into CPI. The March inflation was expected to be low due to ending of high base effect started in March 19. The other reason for low inflation number is virtually no change as compared to Feb 20. The SBP has already eased the policy rate by 225 bps, so no further easing is on cards before May announcement.

The nine-month inflation is standing at 11.5 percent versus 6.3 percent in the same period last year. The inflation trajectory is now moving downwards as it has been on fall since its peak at 14.6 percent in Jan20. The impact of depressed commodity prices in the aftermath of COVID-19 will bring inflation down faster than what was earlier expected. It is hard to give a number at this point and situation is not clear globally how things to move in the next few months.

The fall in inflation is higher in urban which is standing at 9.3 percent while the rural inflation stood at 11.7 percent. The decline in SPI (11.8% in Mar20 versus 14.5% in Feb20) and WPI (9.2% in Mar20 versus 12.6% in Feb20) as compared to previous month is more pronounced than CPI. This implies that inflation of basic items and overall outlook is better going forward.

The declining trend is still to come in core inflation which is at 9.4 percent in Mar20 and the number in Feb was same. This is depicting that basic food items are falling more while the other inflation (second round) is yet to subside. However, the impact of demand slowdown is likely to bring core inflation down too soon.

In March, food inflation remained unchanged as compared to February. That is the main reason for low headline numbers. The food prices moved too much up in the past few months due to short term supply shock and these are reverting to mean. Of course, some increase is sticky, but prices of tomatoes and fresh vegetables are to come down. Some items are yet to revert to normalcy, expect decline in those in months to come.

There is significant (4.4%) decline in transportation group on monthly basis. The decline is in motor fuel (6.2%) and transport services (5.5%). The number is to fall further as April fuel prices are down, and low prices are likely to be the norm in foreseeable future.

In April, non-food monthly inflation is to be high as quarterly house rent recording is to take place. There could be some pressure on a few food items as Ramzan is coming. But it would be interesting to see how the prices spike in days of social distancing. There will be surely less wastage this year holy month as Iftari culture may come to a halt.

Considering all the factors, CPI is expected to be single digits in April and is likely to keep on falling due to base effect and suppressed commodity prices. FY20 full year inflation would be around 11 percent and it will be 7-8 percent in 1HFY21. The forward looking inflation for next nine months (Apr-20-Dec-20) is to remain between 8-9 percent. Seeing this, another rate cut in May cannot be ruled out.