Karachi, January 03, 2023 (PPI-OT): Dec-2022 CPI at 24.5%, Core inflation strong again

December inflation readings came in at 24.5%, taking 1HFY23 CPI to 25.03%. On a MoM basis, CPI increase limited to 50bp as higher inflation in recreation was somewhat offset by lower food inflation this month.

Average core inflation once again came in a little above 16%, third time consecutively led by higher rural inflation NFNE for Rural clocked in at 19% (highest since May-2009).

While we do not expect any hike for now, we do see a probability of further monetary tightening this month taking cue from the prevailing core inflation trend. To recall, SBP had resumed monetary tightening in Nov-2022 citing higher core inflation a key concern.

CPI increases sequentially despite drop in food inflation

December inflation readings came in as expected. The month’s headline inflation clocked in at 24.5%, taking 1HFY23 CPI to 25.03%. On a MoM basis, CPI increase limited to 50bp. The details however reflected some surprise where food inflation dropped sequentially, despite higher SPI readings. Lower food prices were reported this month on account of decline in tomatoes, fresh vegetables, cooking oil etc. On the other hand, price increase was witnessed in segments such as wheat, fresh fruits and milk, which carry a larger weight than the aforementioned segments that reported lower prices as compared to November.

Despite lower food inflation, the headline number increased on a sequential basis on account of 10.9% MoM increase in Recreation segment. While the segment weighs only 1.6% in the basket, the sharp increase in the said offset impact of lower food inflation this month.

Higher core inflation

Though national CPI remain sticky around 24%, rising core inflation readings still warrant attention. Average core inflation came in a little above 16% for the third consecutive month in Dec-2022, led by higher rural inflation as NFNE for Rural clocked in at 19%, surpassing previous month’s levels and making a 13-year high.

Does not rule out further monetary tightening

Given the recent resumption of monetary tightening by the State Bank of Pakistan was reasoned by concerns over escalating core inflation, the ongoing trend of core inflation does not rule out further hikes in the coming months. The next monetary policy announcement is scheduled on 23rd January. We do not incorporate any further hike in the upcoming announcement in our base case, given signs of economic consolidation already emerging. Moreover, with current Policy Rate at 16%, Pakistan’s negative real interest rate is currently at ~850bp, which is expected to sharply decline in Jun-2023 to ~50bp as high base effect would likely bring CPI down to ~16.4%. We however do recognize the probability of further Policy Rate hike on the cards owing to IMF’s recommendations regarding the same.