Inflation is not coming down. The headline number stood at 29.7 percent in December 2023 – slightly higher than analysts’ expectations. The second-round impact is under play, as the inflation monster is not easy to control. The massive gas price increase has further derailed inflation’s path south. Having said that, the base effect is going to come in play, and the 2HFY24 inflation is likely to be less than the 1HFY24 average of 28.8 percent. The SBP might reduce the policy rate and one cannot rule out a token cut in the upcoming policy expected in the last week of January.

Inflation is up by 0.8 percent in Dec while food inflation is down by 0.5 percent. The increase is higher in electricity charges (up by 15.8% MoM) and this was due to the removal of PHL charges in November and being reinstated in December- while the consumer is paying high prices, anyway. Apart from this, there is a general increase across various sectors which depicts the second round in the play.

Interestingly, the monthly decline in food inflation is mainly in urban areas (down by 0.7 percent while the number is slightly up in rural settings (up by 0.1%). On a yearly basis, the urban food stood at 28.8 percent while its 29.3 percent in rural. The headline number in urban (30.9%) is still much higher than in rural (27.9%), as the gas price (pipeline) increase was mainly an urban phenomenon and that will keep the urban inflation up till it completes a 12-month cycle.

In urban, on a monthly basis, perishable food items – are down by 5.3 percent (yearly increase 19.4%), as items like tomatoes, potatoes, tea, and chicken fell to more than offset the increase in Onions, dry fruit, eggs, and other items. The trend is similar in rural areas with less decline almost across the board, with one exception of tea – which is up by 1.1 percent (MoM) while it’s down by 8.6 percent in urban areas. The wholesale prices of tea are down by 3.6 percent.

The biggest increase is in the housing and utility index – up by 3.6 percent, mainly due to electricity charges, as mentioned above. The other notable increase is in liquefied hydrocarbons and solid fuels- as these are in high demand for space heating purposes.

Then the second-round impact is visible in transport services monthly increase of 12 percent in urban areas while the motor fuel increase was mere 2.3 percent. Another notable increase is of woolen readymade garments (4.0% MoM), as the demand is high in the winter season. And on a yearly basis, the increase is across various goods and services – especially in health and textile-related services which is clearly depicting second-round impact in play.

Going forward, the base effect is to bring inflation down and 2HFY24 is expected at 20 percent and the full-year average to be around 25 percent. The risks to watch out for are PKR depreciation and energy prices.