CPI Preview: Steep upturn in food prices to awaken inflationary waves
KARACHI: Steep increase in food prices is likely to awaken wave of inflationary pressures, as the headline inflation for the month of October 2020 is expected to settle around 8.8%- 9.4% with an average estimate of 9.08% YoY compared to 9.04%YoY in the last month and 11.04%YoY in October 2019, as per the projections put forth by various brokerage houses.
This would bring 4mFY21 average inflation to 8.9% as against 10.32% in the corresponding period last year. To note, this is within the range of SBP’s inflation forecast of 7-9% for FY21.
On monthly basis, the inflation is expected to move up with an average estimate of 1.85% MoM compared to the inflation of 1.54% MoM in September 2020.
The food inflation which has been in double digit since August 2019, is the major factor in stimulating October’s inflation. While a strong incitement will also be provided by quarterly house rent adjustment in Oct’20. In addition, the lag impact of PKR depreciation against dollar is also likely to reflect in inflation pace.
The impact of rise in food prices is going to come broadly from both perishables and non-perishables, where chicken, wheat, onion, and tomatoes would be the major contributors. Taking cues from weekly SPI data, under food index which inflated by around 16% YoY during October’20, the prices of fresh milk, wheat, meat and spices surged by 13% YoY, 23% YoY, 11.6% YoY and 40% YoY respectively. Similarly, sugar and tomatoes’ prices also increased by 32.7% YoY and 76.7% YoY respectively. The massive upturn is attributable to shortages of wheat, sugar, tomatoes and other items due to supply disruptions instigated by recent heavy monsoon rains and floods, and lower crops production.
According to the report by Shajar Capital, the food index has surged rapidly since the start of the pandemic as the utility food prices have surged to multi years high, where Flour per bag and Sugar prices have soared to Rs 1,043 per 20Kg and Rs 99 per Kg respectively in the month of Oct’20, despite the permission of import of Wheat and Sugar from international markets at lower prices.
Some minor respite is likely to come on the back of trivial adjustment made in administrated fuel prices amid benign international oil price and strong PKR. As per the report by BIPL Securities, monthly fuel adjustment was also favorably adjusted which will help contain the headline inflation somewhat. However, another impetus from a revision in house rent index which is expected to see a monthly inflation of around 0.4% will erode the favorable high base effect.
On the other hand, transportation index is expected to decline by 1.53% YoY, mainly due to 33% YoY decline in Arab Light prices, 8% YoY decline in petrol prices and appreciation of PKR against dollar by 4.51% YoY during the month under review compared to Oct’19 prices.
Since Rupee has shown potency against USD, this, along with weak oil prices in international market and promising external account position on the back of improved Current account balance, higher remittances and comfortable Real Effective Exchange Rate (REER), are likely to keep inflation in check going forward.
However, the food inflation will remain the major concern as the lower sowing and shortage of food supply would keep food prices on higher side. In addition, further hike in electricity prices in conjunction with the surge in gas meter rent by the OGRA will keep inflation index elevated.
From a monetary vantage, with IMF program currently dormant, SBP would maintain the current policy rate at 7% in upcoming MPC meeting in order to stimulate economy.
However, as the inflationary pressure builds and IMF program is revived, the SBP may be compelled to revive the real interest rate corridor once again, said the report by BIPL Securities. - Mettis Link News