Karachi, June 28, 2022 (PPI-OT): Pakistan Economy: Inflation to clock in at 18.4% in Jun’22

Pakistan’s CPI inflation for the month of Jun’22 is likely to clock in at 18.4% as the impact of retail fuel prices revision starts to get reflected in the headline numbers. This will be the highest monthly reading in over a decade and will take the average inflation during FY22 to 11.85%, well above SBP’s officially stated target of 9% – 11%.

Other than the energy inflation, which comes to ~23%MoM on the back of GoP rolling back the controversial subsidy program, the food inflation was the biggest driver of headline inflation as prices of various food items which show major increase. The biggest jump was seen in items such as potatoes, eggs, pulses and ghee which were up by 15% – 35%.

Successive inflation outturns will likely post higher highs as rising fuel prices, amid PkR depreciation and budgetary measures will keep the CPI inflation downward sticky. To this end, we expect GoP to start collecting PkR10/ltr in petroleum levy (PDL) from Jul’22, averaging out to PkR36/ltr for FY23 with sales tax of PkR21/ltr on top of that.

Consequently, we expect FY23 to be a difficult year with inflationary pressures continuing to remain elevated throughout the period. As a result, we expect FY23 average inflation to settle around 20% with the risk clearly tilted to the upside on the back of rapid currency depreciation and inflationary impacts of budgetary measures.

We therefore expect SBP to raise the interest rates by another 150bps in the upcoming MPS. The secondary market yields have already priced in this hike with yields on short term papers offering yields of 100bps-150bps higher than the current policy rate.