Karachi, August 22, 2022 (PPI-OT): CPI likely to peak in Aug-2022 at 25.78%

We expect CPI reading for Aug-2022 to clock in at 25.78%, surpassing the previous high of Aug-2008 (25.33%). This reflects a 1.26% MoM increase as lower POL prices would likely be more than offset by higher electricity costs and sticky food inflation.

Though 10% PKR depreciation in the last 3 months has taken away some of the potential benefit from the ongoing global commodity price softening, continuation of the trend could lead to a CPI reading lower than our FY23 base case CPI expectation of 21%.

Having said that, we highlight the second-round impact as offsetting variable to that risk, as WPI of 38.55% YoY as of Jul-22 warrants attention.

Aug-2022 CPI likely to peak at 25.78% YoY

We expect CPI reading for Aug-2022 to clock in at 25.78%, likely surpassing the previous high of Aug-2008 (25.33%). As highlighted in our previous reports, our workings suggest CPI would peak this month, with a receding YoY trend expected from hereon.

On a MoM basis, CPI is expected to witness an uptick of 1.26%. The sequential increase is despite a decline in POL prices that were announced in mid-July as impact of the same will likely be offset by 27% MoM higher electricity prices. For perspective, lower POL product prices would likely contribute -20bp to the basket, while the increase in power prices would contribute 121bp to the National CPI.

Food inflation is expected to continue to remain on an upward trajectory, with 120bp MoM increase in Aug-2022, led by sharp rise in the heavy-weight tomato prices in the monsoon season. Moreover, absence of correlation in domestic palm oil prices to the ongoing decline in global palm oil prices would keep price of the food basket sticky.

FY23 CPI pinning hopes on global commodity slowdown

The recent increase in POL product prices would reflect in inflation readings in Sep-2022. In addition to that, reported schedule of PDL application (Rs50/ltr by Jan-2023 for MS and by Apr-2023 for HSD) maintains our inflation trajectory intact for FY23, averaging to 21% for the year.

Breather in global commodities have not yet reflected in the country’s inflation readings. In the last three months, global palm oil prices have trimmed by 35%, where crude oil prices have declined by 20%. Though 10% PKR depreciation has taken away some of the potential benefit from the ongoing global commodity trend, continuation of the trend could lead to a CPI reading lower than our FY23 base case CPI expectation of 21%. On the other hand, the impact of these may also be offset by the second-round effects. To recall, WPI has reached 38.55% YoY in July-2022.