Karachi, July 24, 2023 (PPI-OT): Jul-2023 CPI to drop to 7-month low at 26.6% YoY

We expect CPI for Jul-2023 to clock in at 26.6% - lowest YoY reading in last seven months; despite MoM increase of 2.09% and core inflation at 21.84% (up 2.59% MoM). This includes impact of 25%+ increase in power costs (4.6% weight in CPI).

There is uncertainty around which month PBS incorporates the impact of electricity tariff hike. So far SPI has not reflected the hike and if monthly CPI numbers are extrapolated based on SPI, then CPI for the month could clock in ~25.8% YoY.

The prospective disinflation trend in FY24 has potentially brought Pakistan back to real interest rate environment on a forward-looking basis after a long span of three years. The latest IMF report for Pakistan has however pushed out market expectations regarding peak interest rates; which is now expecting another hike in the 31 July Monetary Policy meeting.

CPI to drop to 7-month low even with higher power prices

We expect CPI for Jul-2023 to clock in at 26.6% - lowest pace in the last seven months, despite MoM increase of 2.09% and core inflation at 21.84%, with a MoM uptick of 2.59%. To recall, the decline in YoY pace comes from high base effect where same period last year had witnessed sharp energy and food price increases. We incorporate a 167bp MoM increase in food prices over higher Wheat and Vegetable prices, taking Food inflation to 36.3% YoY this month - a 7-month low again. We also take a slight increase in POL product prices as the decline of ~Rs8/ltr was implemented after 14th of the month. Moreover, July’s CPI will also reflect the quarterly housing index adjustment.

We highlight the price change in the 4.6% weighted head item - Power segment, can take the headline CPI between 25.8% - 26.6%. The range arises from the increase in Power tariff notified for Jul-2023 not being reflected in SPI data as yet. Assuming SPI Jul-2023 readings for electricity prices give CPI of 25.8%, while incorporating 25%+ increase in Power prices increases CPI to 26.6%.

Change in monetary policy expectations despite disinflation

The prospective disinflation trend in FY24 has potentially brought Pakistan back to real interest rate environment on a forward-looking basis after a long span of three years, which had raised expectations interest rates peaking at current levels and a monetary easing cycle to begin from next year. On our estimates, the next 12M average CPI, the data comes at 21%, reflecting a positive 100bp real interest rate at present.

The latest IMF report for Pakistan has however brought some changes to market expectations as the report highlights SBP’s need to continue the tightening cycle to re-anchor inflation expectations. As per the report, SBP has agreed to maintain a tight monetary policy stance - higher rates and prudent use of liquidity injections - to achieve real positive interest rates, on a forward-looking basis. The above IMF’s observation, has impacted monetary policy expectations with market participants now expecting further increase in Policy Rate in the Monetary Policy meeting scheduled on 31st July.