Karachi, July 04, 2023 (PPI-OT): CPI trend decelerates; risks to FY24E CPI emerge
CPI for Jun-2023 has been reported at 29.4%, after a four-month streak of +30% inflation, taking FY23 average to 29.04%, over the long-awaited base effect, while a MoM decline of 26bp MoM increased the pace of declining trend.
Our base case forecast for FY24 CPI stands at 20% but trend of PKR/US$ parity could be a key influencing variable. While the looming debt repayments pose a risk to the PKR, the IMF program could address some concerns on that front. PKR has appreciated by ~Rs10 to Rs275/US$ in early hours of trading today.
Steps taken to secure the IMF deal however appear inflationary in nature - the 30% reported increase in power tariff could alone add 140bp (first round impact) to annual CPI, while increase in PDL will also be inflationary by either leading to an increase in retail fuel prices or limiting the pass-on of any benefit of lower global oil prices.
CPI trend decelerates from Jun-2023
As highlighted in our earlier note, inflation trend has begun to decelerate on the long-awaited base effect from Jun-2023. CPI for Jun-2023 has been reported at 29.4%, after a four-month streak of +30% inflation, taking FY23 average to 29.04%. In addition to the base effect, the cumulative ~Rs30/ltr decline in POL product prices, and relatively lower food prices (-1.01% MoM) this month led to a MoM decline of 26bp, increasing the pace of declining YoY CPI trend.
NFNE pace declined to 23.49% YoY in Jun-2023, despite an uptick of 25bp MoM, averaging at 23.54% for FY23. Moreover, WPI trend also declined to 22.40%, with a MoM decline of 30bp, taking FY23 average to 33.03%.
Risks to FY24E CPI emerge
While we expect FY24 CPI to average around 20%, play of PKR/US$ deprecation would be crucial from here, amid the country’s low import cover and higher debt payment obligations at present. The recent fresh agreement with IMF of a US$3bn SBA, alongside reported support from Saudi Arabia could however address these
concerns in the medium-term. PKR has appreciated by ~Rs10 to Rs275/US$ in early hours of trading today which is the first trading session since the announcement of the IMF Staff Level Agreement.
Moreover, steps taken to reach to the IMF deal also seem inflationary to some extent, while volatile global oil price would also remain a key factor to the prospective inflation readings, citing these are key risks to the inflation trend. These include, but not limit to higher taxes and increase in energy costs. An increase of ~30% increase in power tariff for the whole year could take FY24E CPI to 21.4%.
To note, the recent PDL Rs5/ltr increase in MS, taking it to Rs55/ltr, has not had any impact on retail prices yet. However, expectation of PDL to reach to Rs60/ltr for MS and HSD both (HSD: current PDL at Rs50/ltr) would likely lead to upward revision in POL product prices, and a limited second round impact as it only makes 2% - 4% of prevailing retail prices.