Karachi, June 21, 2022 (PPI-OT): CPI: Jun-2022E likely to report 13-year high of 19.2%

We expect Jun-2022 CPI to clock in at 19.2%, with MoM increase at 4.53%; substantially higher than 11MFY22 average CPI of 11.26% and May-2022 reading of 13.76%, owing to higher fuel and food prices, taking FY22E average CPI to 11.92%.

We believe further inflationary pressures are likely as recent fuel price hikes; petrol up +Rs84/ltr (+56%) and HSD up +Rs119/ltr (+82%), have eliminated the subsidy. Addition of Rs30/ltr PDL likely to be announced by mid-July would add 35bp to inflation reading next month.

This would be in addition to the snowball effect on food prices in coming months, compounding the impact of sharp PKR depreciation and global commodity prices, leading to a possibility of a 100bp increase in the Policy Rate next month.

Jun-2022E: MoM CPI at 4.53% on removal of fuel subsidy

We expect Jun-2022 CPI to clock in at 19.2% (highest since Feb-2009), as our MoM working computes to 4.53%, marking the highest increase since data available (1995). This would be substantially higher than 11MFY22 average CPI of 11.26% and May-2022 reading of 13.76%, owing to (1) significant increase in Transport segment (weight: 5.9%) from the ongoing higher fuel prices and (2) further jump in food inflation (weight: 34.58%). The higher food inflation expectations are led by higher milk, meat and vegetable prices.

Our NFNE inflation readings also go back to the double-digit vicinity for Jun-2022E, at 11.49%, which was otherwise contained in the range of 9.4-9.6% since Feb-2022.

PDL impact, followed by second-round bearing, yet to come

The Relief Package shield has been lifted from fuel inflation, however the government has so far only passed on the subsidy burden to the masses by announcing +Rs84/ltr (+56%) increase in Petrol prices and +Rs119/ltr (+82%) increase in HSD prices in the past 4 weeks. Given the pace of decline in SBP’s foreign exchange reserves and our import cover reaching at an alarming level of 5 weeks, meeting IMF’s condition on PDL of Rs30/ltr on both products is inevitable. The same would bear an impact of 0.35% on CPI reading, in addition to 45bp led by the levy of GST on the same.

The massive jump in fuel prices would also lead to snowball effect on food prices in the coming months, compounding to the sharp PKR depreciation impact and global commodity prices. These effects are over and above our base case assumptions for the monthly CPI readings presented below, which reflect the impact of announcement of PDL (Rs30/ltr), GST on fuel prices (~Rs47/ltr) and electricity price increase of Rs7.9/unit distributed in 3 rounds.

Though much adjustment in monetary policy settings have taken place, our projections still reflect negative real interest rates till May-2023. We do not rule out the Monetary Policy Committee to announce a 100bp increase in the next MPS, scheduled less than 3 weeks from now (7th July).