Karachi, August 02, 2022 (PPI-OT): Jul-22 CPI of 24.9% takes RIR to -10 ppt; 150bp PR hike likely

Following the enormous 6.3% MoM spike in June CPI, July 2022 witnessed another massive sequential increase of 4.35%, taking July reading for YoY CPI to 24.9%. The YoY reading touched its highest level since Oct-2008 (25%).

The wholesale price index (WPI), the indicator measuring price trends of goods before sold at retail, also remained at elevated levels and above the high marked during the global financial crisis, reaching 38.5% in Jul-2022.

July’s CPI readings have pushed the base even higher, where potential cost pressures may now keep CPI above 20% till May-2023, albeit peaking in Aug-2022. We believe the State Bank of Pakistan (SBP) would continue a hawkish monetary policy stance with at least another 150bp increase in the Policy Rate this month.

Jul-2022 CPI touches 14-year high at 24.9%

CPI for Jul-2022 once again surpassed street estimates (~23%), clocking in at 24.9% YoY, touching the highest level since Oct-2008 (25%). With a MoM increase of 4%, the key reasons of the high inflation reading were (1) impact of higher POL product prices, (2) quarterly Housing index and (3) ongoing sticky food inflation. This time, non-perishable food items led inflation in the Food basket. Food inflation clocked in at 27%/30% for Urban/Rural regions, respectively. The Urban Non-Food Non-Energy (NFNE) inflation reading for the month continued an upward trajectory, clocking in at 12%, while Rural NFNE reported double-digit inflation an even higher pace of 14.6%.

The wholesale price index (WPI), the indicator measuring price trends of goods before sold at retail, further increased by 2% MoM, taking the YoY change to 38.5%. We re-iterate indication of second round of inflation form these readings, which may also impact financial health of the SME and Commercial segment if all cost pressures are not passed on to the consumer prices.

FY23 CPI expected at 21.4% on higher energy prices

July’s CPI readings have pushed the base even higher, where potential cost pressures may now keep CPI above 20% till May-2023, albeit peaking in Aug-2022. The existing CPI number reflects real interest rates expanding to south of -10 ppt.

Our base case incorporates increase in Power tariff, gradual increase in PDL and GST and MoM increase of 0.7% (higher than historical average of 0.6% MoM incorporating second round of inflation from higher energy costs and sharp PKR devaluation) leading to CPI averaging over 21% in FY23, compared to our previous estimates of 19%. These levels would be a multi-year high as the last time Pakistan witnessed CPI readings of similar levels on an annual basis was in FY09 (20.8%), and before that in the mid-1970s.

We believe the State Bank of Pakistan (SBP) would continue a hawkish monetary policy stance to arrest the sharp rise in consumer prices and slow down the overheated economy, leading to our expectations of another 150bp increase in the Policy Rate this month.