Karachi, October 03, 2023 (PPI-OT): Ongoing energy price hikes and uptick in WPI could maintain pressure on MoM inflation

CPI for Sep-2023 clocked in at 31.4% YoY, over low base effect, while MoM increase came in at 2.0%. Core inflation continues to expand, while gap between Urban and Rural core inflation is simultaneously expanding, largely owing to (1) Clothing and (2) Restaurant segments - both depicting contrasting trends in urban and rural inflation.

Looking ahead, while recent PKR appreciation has led to ~Rs10/ltr decline in POL product prices, we believe correlation of POL prices and heavyweight segment such as food might not be as strong on the way down - as was witnessed in the last instance of significant POL price cuts during Covid in 2020.

Looking ahead, pending increase in gas prices (estimated in Nov-2023) would add ~40bp to MoM inflation in the first round, the second-round impact of the hike translating into end user prices will exert upward pressure on CPI and compound the impact of the recent uptick in WPI (+3.1% MoM in September and +10% in the last three months).

Sep-2023 CPI clocked in at 31.4% YoY, as MoM increase came in at 2.0%. Whilereadings came in higher than CPI trend witnessed in preceding two months ofaround ~28%, the reading for this month should be considered as a blip on accountof low base set in Sep-2022, led by one-time power tariff adjustment of -65% MoMin Sep-2022.

On a MoM basis, in addition to the expected impact from higher POL product prices (+12% MoM), the key driving segment to monthly uptick was Food, which reported an increase of 164bp MoM. Moreover, the month also reported third consecutive sharp sequential increase in WPI (+3.1% MoM), where increase since Jun-2023 accumulated to 10%.

Core inflation reaches new records Core inflation continues to expand, while gap between Urban and Rural core inflation is simultaneously expanding. We believe the key segments contributing to the said factor are (1) Clothing and (2) Restaurant.

Where Clothing segment carries a higher weight of 9.5% in the Rural CPI basket, compared to 8% in Urban, a disconnect between pace in both region’s segment inflation since May-2023 (refer chart below) has reflected a magnifying impact on Rural’s core inflation. On the other hand, while the weight of Restaurant segment in the Rural CPI (6.2%) is lower than in Urban’s basket (7.4%), a sticky pace in Rural’s Restaurant inflation (refer chart below), compared to disinflation in Urban’s said segment during the same time, has added to higher core inflation in the Rural region.

Recent PKR appreciation benefit may limit to POL price cut While the recent PKR appreciation against US$ has led to ~Rs10/ltr decline in POL product prices, we pin lesser probability of the same to trickle down in heavy-weight segments such as food prices, as depicted in historical trends as well.

The last time Pakistan witnessed notable POL price decline was in FY20. During that time, as represented in the chart below, food inflation index and headline inflation index, both, remained sticky despite 35% decline in petrol prices. Moreover, other pending energy cost hikes are expected to keep the sequential trend in the positive territory. Assuming a 40% gas price hike in Nov-2023 leads to adding ~40bp to the CPI reading as its weight is only 1% in the total basket. This may add to the pressures compiling from the already escalating WPI in the form of potential cost pass on by the affected industries. Nonetheless, despite increasing sequential inflation, the higher base set in preceding months is likely to lead to disinflation during 2HFY24.