Karachi, December 23, 2021 (PPI-OT): Headline inflation for Dec-2021 expected at 12.2%

Broad inflation for Dec-2021 is expected to reach 12.2% despite a sequential decline in food and fuel inflation as the Nov-2021 print of 11.5% had set a higher base for further movement in the CPI basket.

Food inflation has been reducing after prints of combined SPI over the last few weeks suggested a decline in essential food items and a sequential decline in fuel inflation will also commensurate such movements in the overall inflation.

Near-term inflationary pressures are expected to remain strong despite decline in oil prices which continue to ease on demand concerns over Omicron as monthly hike in petroleum levy of Rs4/litre and upcoming house rent adjustment will transmit next month.

Some respite in food inflation

We estimate headline inflation for Dec-2021 to clock in at 12.2% despite the decline in fuel and fuel inflation as the Nov-2021 print has set a higher base. SPI print has been declining sequentially for three weeks before rising slightly during the week ended Dec16’21. For the three weeks that it continued to decline consecutively, major respite was witnessed in essential food items namely tomatoes (-44%), potatoes (-20%), onion (-16%), chicken (-23%) and sugar (-9%). This is expected to seep into general inflation where our calculations suggest a decline of 1.2% MoM in food inflation. However, due to a higher base, food inflation will likely remain in double digits at 12.8% for Dec-2021.

As well as fuel inflation

In an interesting move, on Dec15’21, the government slashed fuel rates by Rs5/litre against Rs10-11/litre proposed by the OGRA. The decision that reduced prices by half of the proposed decline was made while enhancing various heads in the fuel price mechanism. Government increased OMC margin, dealer margin and sales tax to take away Rs5.5/litre of the proposed decline, while only reducing fuel prices by Rs5.0/litre. While this reduced fuel prices by only 2% on a sequential basis, it has only 1% impact on the transport index.

We believe, the government should not have provided this respite in retail fuel prices and most of the decline in ex-refinery prices could have been transferred into PDL collection, which remains sluggish against the Rs610bn budgetary target and the current collection rate of Rs13.62/litre has to take major strides to reach its peak rate of Rs30/litre.

Near-term inflation will likely remain high

The inflationary pressures have not subsided with the recent decline in essential food prices. While international oil prices continue to ease over emerging demand concerns after spread of Omicron triggered travel restrictions across Europe and other regions, there is a likelihood that some of the decline will be taken away by the monthly Rs4/litre hike in petroleum levy of fuel rates as well as the increase in sales tax rate, if any. Moreover, Jan-2022 is slated to witness the stipulated house rent index adjustment which keeps inflationary expectations elevated as we enter CY22. Some respite may engender as we move beyond Jan-2022 while more decline in international commodity prices can trigger as global central banks move to reduce the pace of asset purchase programs and/or increase rates.