Headline inflation is expected to decline further in the first month of the new fiscal year (July) against 29.4% recorded in June, brokerage house Arif Habib Limited (AHL) said in a report on Wednesday.

“As FY24 commences, there is an anticipation of witnessing a decline in headline inflation on a YoY basis, marking a low point since December 2022’s CPI (Consumer Price Index) reading of 24.5% YoY.

“We expect inflation to clock in at 26.4% during July 2023 against 24.9% YoY recorded in same period last year and a decline from 29.4% YoY registered in the previous month,” said AHL.

However, the brokerage house projected monthly inflationary pressures to persist with an expected increase of 1.9% MoM.

“Notably, the recent power tariff hikes are likely to have a significant impact on the monthly inflation rate,” said the brokerage house.

“We have factored it into our inflation readings, which are expected to indicate a MoM jump of over 27%. If we exclude this MoM jump, the headline inflation would decrease to 25.2%YoY.

“Additionally, adjustments in the housing index, attributed specifically to the quarterly house rent, may further contribute to fluctuations in inflation on a monthly basis, with a projected increase of 4.9% MoM.

“Moreover, food prices are expected to exhibit an increase of approximately 1.9% MoM, which could potentially impact the overall inflationary trend.”

The report said that food items such as wheat, fresh vegetables and sugar are likely to be the primary contributors to this upward trend in food prices.

“Looking forward, the main risks to overall inflation are expected to be driven by high food and energy prices (gas tariff hike yet to be announced), potential impacts of budgetary measures, and the vulnerability of a weaker currency,” said the report.

Upcoming MPC

With inflation being a key metric for the Monetary Policy Committee meeting currently scheduled for July 31, all eyes are on the central bank if it increases or keeps on hold the key interest rate.

It is pertinent to mention that the meeting is scheduled a day before the inflation readings are announced.

Earlier, two brokerage houses formed a consensus, saying they believe the State Bank of Pakistan (SBP) is unlikely to revise the key policy rate.

“We expect the SBP to hold the policy rate at 22% in this meeting (on July 31),” said Arif Habib Limited (AHL) in a report on Wednesday.

However, some experts believe the SBP could also hike the key policy rate especially since the IMF has called for a continuation in monetary tightening if inflationary pressures persist.