Karachi, July 29, 2022 (PPI-OT): Pakistan Economy: Inflation to clock in at 23.1% in Jul’22

We preview CPI inflation during the month of Jul’22 to clock in at 23.1%. This comes on the back of monthly inflation of ~2.8%MoM. The major contributions come from spike in the prices of perishable food items, increase in administered petroleum prices, revision in electricity tariffs and quarterly revision in HRI during the month of July.

This will be the highest monthly inflation reading since Nov’08 where the CPI inflation was recorded at 24.7%. The headline inflation comes with rural inflation expected at 24.7% while urban inflation is likely to settle around 22.1% during the month.

Global commodities have started easing off significantly with FAO index down by 4.1%from May’22. An ease off in global commodity prices should ordinarily result in easing off inflationary pressures in the country, however, recent bouts of currency depreciation will likely neutralize the impact.

Inflation is likely to remain downward sticky owing to i) further increase in POL products prices moving forward (increase in PL to PkR50/ltr, and resumption of GST), ii) increase in energy tariffs, and iii) hefty depreciation seen over the last few months. Consequently, our FY23 average inflation estimate currently stands at 21.4%.

With real interest rates still in the negative zone, SBP will likely be forced to upward revise the interest rates even further. However, we may see interest rates stabilizing around 16% – 16.5%, resulting in real interest rates remaining negative throughout FY23.