Karachi, September 04, 2023 (PPI-OT): Fuel price hikes and falling PKR imply burden on prospective CPI
Aug-2023 CPI clocked in at 27.4% YoY, lower than street estimates as MoM increase came in at 1.7% vs estimate of 2.83% MoM. This was in contrast to trajectory depicted by SPI (+410bp MoM) and WPI (+420bp MoM).
Core inflation (excluding food and energy) clocked in at 20.7% - lowest in seven months, reflecting base effect beginning to kick in, especially in the Urban inflation basket.
In line with CPI methodology, the Aug-2023 data does not incorporate last two domestic POL price hikes of cumulative Rs36/ltr (the 15th Aug hike will be reflected in Sep alongside the increase implemented from 1st Sep). In addition to these two hikes (which account for currency at Rs300/US$), ongoing depreciation and rising international oil price pose further upside risk.
Pertinent to note that Sep-2023 CPI will also face base effect anomaly as Sep-2022 CPI had seen a short-term downward blip due to power tariff adjustment - this will also push YoY inflation print for Sep-2023 higher than the ongoing trajectory.
Sequential price pressures limit impact on Aug-2023 CPI
Aug-2023 CPI clocked in at 27.4% YoY, lower than street estimates as MoM increase came in at 1.7% vs estimate of 2.83% MoM. The deviation emerged from increase in food segment limiting to 57bp MoM, vis-a-vis estimates of 350bp+ which were driven by SPI readings for food prices. To note, SPI data reflected 410bp MoM increase, while WPI also reported a higher MoM increase of 420bp.
Ongoing increase in fuel prices also remained a key contributor to the MoM increase - contributing 47bp driven by the 8% MoM increase in the 6% weighted segment. On the other hand, core inflation (excluding food and energy) clocked in at 20.7% - lowest in seven months, reflecting base effect beginning to kick in, especially in the Urban inflation basket.
Recent fuel price hikes yet to reflect in inflation
In line with CPI methodology, the Aug-2023 data does not incorporate last two domestic POL price hikes of cumulative Rs36/ltr (the 15th Aug hike will be reflected in Sep alongside the increase implemented from 1st Sep). In addition to these two hikes (which account for currency at Rs300/US$), ongoing depreciation and rising international oil price pose further upside risk.
Where present interbank rates stand at 305, open market rates trade around 332 (9% gap). Moreover, global oil price trend inching upwards with changing demand/supply dynamics, pressure from higher commodity prices is not ruled out. Both these factors are expected to result in inflationary impact for Pakistan as they are also followed by second-round impacts in other heavy-weight segments of the CPI baskets.
We recall the sharp PKR depreciation (~17%) during the first few weeks of CY23 triggered successive sequential MoM CPI increase of ~300bp over Jan-2023 to May-2023, a rare streak witnessed in Pakistan’s history. This was driven by ~350bp monthly increase in Food inflation and ~325bp MoM increase in Transport inflation during the same period.