Karachi, July 04, 2022 (PPI-OT): Further inflation approaching; FY23 CPI to remain in high teens

With an enormous 6.3% MoM spike in June 2022 CPI, YoY inflation reading clocked in at 21.3%, touching its highest level since Dec-2008 (23.34%) and bringing FY22 average to 12.1%.

The wholesale price index (WPI), the indicator measuring price trends of goods before sold at retail, has crossed the high marked during the global financial crisis, reaching 38.94% in Jun-2022.

For FY23, taxes and levies on POL products and un-winding of electricity subsidy leads to our CPI estimates averaging at 18.8% in FY23. We expect the State Bank of Pakistan (SBP) to continue a hawkish monetary policy stance to arrest the sharp rise in consumer prices, with at least another 100bp increase in the Policy Rate later this week.

Jun-2022 CPI touches 13-year high at 21.3%

CPI for Jun-2022 surpassed street estimates (~17.8%) and our estimates (19.2%), clocking in at 21.3% YoY, touching the highest level since Dec-2008 (23.34%). This brought FY22 to an end with CPI averaging at 12.1%. With a MoM increase of 6.3%, the key reasons of the high inflation reading were (1) ~Rs100/ltr increase in POL product prices and (2) ongoing sticky food inflation. Perishable food items led inflation in the Food basket. Food inflation clocked in at 24%/27% for Urban/Rural regions, respectively, averaging at ~13% for FY22.

The Urban Non-Food Non-Energy (NFNE) inflation reading for the month entered double-digit zone, clocking in at 11.5%, while Rural NFNE reported double-digit inflation for the fourth consecutive month, at 13.6%.

The wholesale price index (WPI), the indicator measuring price trends of goods before sold at retail, has crossed the high marked during the global financial crisis, reaching to 38.94% in Jun-2022. This reflects much pressures in the economy, where some, if not all, will be passed on to the consumer prices.

FY23 CPI expected at 18.8% on higher energy prices

The existing CPI number reflects real interest rates expanding to south of -700bp, where our base case assumptions project a similar trend to continue till Oct-2022. Our base case incorporates Rs7.5/unit increase in Power tariff, gradual increase in PDL and GST and MoM increase of 0.7% (higher than historical average of 0.6% MoM incorporating second round of inflation from higher energy costs) leading to CPI averaging over 18.8% in FY23.

For perspective, the CPI base is high enough for it to average at 15% even in the best-case scenario where one does not incorporate any increase in POL product price increase or other one-time energy cost hike from here onwards and only takes a 0.5% MoM uptick for the whole of FY23.

We believe the State Bank of Pakistan (SBP) would continue a hawkish monetary policy stance to arrest the sharp rise in consumer prices and slow down the overheated economy, leading to our expectations of at least another 100bp increase in the Policy Rate this week.