Karachi, February 20, 2023 (PPI-OT): Food / fuel compound deval pressures – Feb CPI to cross 31% with more to come

We preview Feb-2023 CPI headline, expecting it to clock in at 31.5%, due to a sharp 4.5% MoM increase, primarily led by 8% MoM higher food and transport prices. This would take YoY Food inflation to 50%.

While these numbers only reflect partial impact of recent 15% PKR devaluation, remaining impact of the same and ongoing macro adjustments such as gas and power price increases would reflect in coming months.

This would also bring another round of sharp increase in food prices, likely keeping CPI levels above existing Policy Rate of 17% till at least Dec-2023 and delay monetary easing opportunity.

Moreover, rising inflation and IMF recommendations to bring real interest rates in the positive zone (negative 1,100bp at present) keeps our expectations of monetary policy to continue to tighten in 1QCY23.

Feb-2023: PKR devaluation to take food inflation to 50% YoY

We preview Feb-2023 CPI headline, where we expect the data point to clock in at 31.5%. This new high is in line with our projections explained in an earlier note released post the recent ~15% PKR devaluation, where we had explained what impact the sharp PKR devaluation have on CPI. The increase, however, is higher than what we expected, as current workings suggest sharp increase of 4.5% MoM, versus 2.5% estimates earlier. The higher jump is a result of higher increase in food prices, which is ~30% of the CPI basket.

Breaking the reasons of the higher food inflation, to recall, the sharp adjustment in PKR devaluation has resulted in ~16% increase in POL products, leading to higher transport costs. We however do not rule out the actual jump to be higher than our projections, driven by the Rural segment, a trend continuing since the last six months.

Food inflation may clock in at 8% MoM, led by higher Wheat, Rice, Chicken, cooking oil, fresh fruits and vegetables prices. These food items contribute a total weight of ~10% to the CPI basket that may post an average MoM increase of 27%. The situation is grave with expectations of +50% YoY food inflation for Feb-2023E, where probability of higher prices is way more than stability or a decrease in the coming months.

Impact from further rupee deval and adjustments yet to come

With the next leg of POL product price increase of Rs22/ltr (+9%) announced in mid-Feb-2023, again pertaining to PKR devaluation, we would witness higher transport and food prices in Mar-2023’s CPI data. This would be in addition to the impact arising from macro adjustments such as the recent gas price increase, due increase in power tariffs and impending taxes/levies on POL products.

The same would also bring another sharp increase in food prices, making the situation even serious. This scenario would likely keep CPI levels above the existing Policy Rate of 17% till at least Dec-2023, assuming no relief from a prospective decline in commodity prices, delaying any monetary easing opportunity.

In addition, news flow suggesting IMF recommendations to bring real interest rates in the positive zone (negative 1,100bp at present) highly increases prospects of monetary policy to continue to tighten during 1QCY23. While the next Monetary Policy announcement is scheduled in Mar-2023, the secondary market yields have incorporated expectations of ~100bp hike in shorter tenor yield movements last week.