Karachi, August 30, 2023 (PPI-OT): Aug-23: CPI Outlook Worsened; Likely to Rebound Further to 28.8%y/y

For Aug-23, we estimate national CPI to clock in at +28.8%y/y growth compared to the previous month's +28.3%y/y. On a monthly scale, Aug-23 is estimated to show a +2.9%m/m growth compared to +3.5%m/m in Jul23.

Previously, we estimated inflation to remain sticky on average at +26%y/y for the next 8 months including this month. However, sharp currency depreciation primarily due to the resumption of import normalization, rising trend of food prices, continuation of further fiscal tightening, and upward revision of gas prices have worsened the outlook and now we project CPI to escalate to +28-29%y/y on average.

In our view, SBP will likely jack up key rates in its upcoming policy meeting on the 14th of September as the inflationary outlook has worsened.

We preview Aug-23 National CPI estimates.

Monthly Inflation to Clock in at +28.8%y/y

For Aug-23, we estimate national CPI to clock in at +28.8%y/y growth compared to the previous month's +28.3%y/y. On a monthly scale, Aug23 is estimated to show a +2.9%m/m growth compared to +3.5%m/m in Jul-23. This month’s inflation is mainly driven by Food and Transport Indices.

Food prices resume their skyrocketing trend

Monthly Sensitive Price Index (SPI), which is a proxy index for volatile food prices, suggests prices are likely to rise overwhelmingly by +5.2%m/m basis. During the month of Aug-23, key food items including sugar, tomatoes, chilies powder, eggs, etc. have increased sharply over the previous month.

Transport Index rises as fuel prices jump

For the month of Aug-23, the transport index is likely to increase by +5%m/m as fuel prices escalated on average up by +4.6%m/m owing to PKR depreciating effects commingled with a slight increase in international crude prices, while PDL remains unchanged. However, we do not observe any significant change in the prices of transport vehicles.

Outlook

Previously, we estimated inflation to remain sticky on average at +26%y/y for the next 8 months including this month. However, sharp currency depreciation primarily due to the resumption of import normalization, rising trend of food prices, continuation of further fiscal tightening, and upward revision of gas and petroleum prices have worsened the outlook and now we project CPI to escalate to +28-29%y/y on average for the coming 8 months before plummeting down owing to high base effects. In our view, SBP will likely jack up key rates in its upcoming policy meeting on the 14th of September as the inflationary outlook has worsened.