Karachi, December 21, 2022 (PPI-OT): Dec-22 CPI to remain elevated over higher food prices

We expect CPI reading for Dec-2022 to clock in at 24.4% taking 1HFY23E headline inflation to 25.03%. We expect inflation to expand 44bp MoM in Dec-2022, as higher food prices are likely to offset potential decline in other segments.

We expect non-food non-energy inflation to remain stable sequentially and decelerate in Dec-2022 on a YoY basis.

Drop in international oil prices are a key upside to our FY23 CPI average estimates of 23.8%, where we have incorporated FY23E average oil prices at US$95/bbl vis-a-vis prevailing prices of US$80/bbl.

Dec-2022 CPI to reach to 24.4% YoY

We preview CPI headline for Dec-2022 where we expect a YoY increase of 24.4%. As a result, 1HFY23 CPI is expected to average at 25.03%. On a MoM basis, we expect inflation to expand 44bp as higher food prices this month are likely to offset potential decline in other segments.

Food inflation is expected to increase by 140bp MoM, led by perishable food prices like eggs, fresh fruits, onions, which have increased by 9% to 22% MoM. Higher food prices are expected to take food inflation up to 37.6% YoY, crossing the previous record high of 36% YoY reported in Oct-2022. On the other hand, non-food non-energy inflation is expected to remain stable sequentially, and decelerate in Dec-2022 on a YoY basis.

Decline in oil prices may invite relief

While food prices soar at present, drop in international oil prices are a key upside to our FY23 CPI average estimates of 23.8%, where we have incorporated FY23E average oil prices at US$95/bbl vis-a-vis prevailing prices of US$80/bbl.

The reduction in international oil prices have so far helped in keeping retail POL prices steady, by increasing levies to assist in higher government revenue collection. Ex-refinery prices have declined by 34% since its peak in Jul-2022. Meanwhile, levy on petrol has increased to its cap level at Rs50/ltr, maintaining retail prices at a constant, hence no impact of higher levy on CPI.

As witnessed last week with a cut in POL prices, any window of relief from lower international oil prices would foremost be availed by the government to reduce Pakistan’s transportation costs, the head item that is 6% of CPI’s basket.

Our calculations suggest every Rs50/ltr decline in POL product prices (~20% of current base) would contribute a ~55bp MoM decline in CPI readings, in addition to second-round impact with reduction in cost of doing business. Nonetheless, with current Policy Rate at 16%, the country will still remain in negative real interest rate environment till May-2023 as CPI readings are likely to remain above 20%.