Karachi, July 18, 2022 (PPI-OT): Second round of inflation to take Jul-2022 CPI to 22.3%

We expect CPI to clock in at 22.3% (highest since Dec-2008) for Jul-2022, as our MoM working computes to 2.2%, marking the highest increase since Nov-2021, owing to (1) ongoing higher fuel prices, (2) higher food prices, (3) adjustment in electricity charges and (4) start of second-round effects.

The cut in POL product prices recently announced is likely to reflect in next month’s readings given the time schedule for collection of data for CPI prices is up to the 10th of each month.

Going forward, the impact of decline in global commodities may be offset by further cost-push inflation from higher energy prices on the cards. Our projections for 18%-19% CPI for FY23 are intact where continuation of respite in global commodities is an upside to our projections.

Jul-2022E: Second round of inflation to kick in

We expect CPI to clock in at 22.3% (highest since Dec-2008) for Jul-2022, as our MoM working computes to 2.2%, marking the highest increase since Nov-2021, owing to (1) material increase in Transport segment (weight: 5.9%) from the ongoing higher fuel prices, (2) further jump in food inflation (weight: 34.6%), (3) significant adjustment of 25% MoM in Electricity Charges (weight: 4.5%) and (4) impact of cost push inflation in various segments.

The higher food inflation expectations are repeated by higher milk, meat and vegetable prices; while the second-round impact takes our NFNE inflation readings up beyond 16%, which was otherwise contained in the range of 9.4-9.6% during the most of 2HFY22.

Second-round effects may offset lower POL product prices

While POL product prices have declined this month, the announcement is expected to reflect in next month’s readings given the time schedule for collection of data for CPI prices is up to the 10th of each month. Moreover, global commodities are witnessing some breather since a couple of weeks; where decline in Palm oil prices, crude oil prices, food and grain prices etc. would also bode well for Pak’s headline inflation in the coming months.

Having said that, the impact of these may be offset by the second-round effects. To note, domestic milk and wheat prices, that contribute 10% to the basket, are up 15% in the last couple of months. These are among the key basics for other food products leading to potential continuation of the snowball effect in the upcoming inflation readings. These will likely be compounded by the higher electricity and gas prices that are already on the cards.

Our FY23 CPI projections of 18% – 19% remains intact, including the impact of rising PDL and implementation of GST on POL products and un-winding of subsidy on electricity tariffs. Continuation of respite in global commodities is an upside to our projections.