Prices of essential items record decade high

Prices of essential items record decade high

Prices of essential items record decade high

The country records highest inflation record in decades – Google

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  • High prices have been witnessed according to analysts.
  • The inflation rate is likely to rise up to 16.5 per cent in the coming fiscal year.
  • SBP has increased the policy points to 400 in 2022.
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KARACHI: The prices of essential items for the week ended June 16, 2022 have witnessed the highest increase in over a decade, analysts said on Wednesday.

The Sensitive Price Indicator (SPI), which is used to measure the weekly price movements of essential consumer items, went up 3.38 per cent WoW (28 per cent YoY) during the week ended June 16, 2022 against the last 10-year average weekly increase of 0.2 per cent.

Read more: PTI workers stage nationwide protest against inflation

“This is the highest increase in over a decade,” said Umair Naseer at Topline Securities.

With a sharp surge in the local petrol prices, the rupee depreciation and expected adjustments in the power and gas tariffs, there are signs of significant uptrend in inflation, going ahead.

For June 2022, the Consumer Price Index (CPI) inflation is likely to remain in the range of 18.5 per cent to 19.5 per cent on YoY basis (3.9 per cent to 4.8 per cent on MoM basis).

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Pakistan is also anticipated to witness a streak of 15 per cent plus inflation for the next four to six months where it is anticipated to peak around 21 per cent in August 2022.

In the next fiscal year, the average inflation is likely to be around 15.5 per cent to 16.5 per cent, compared with Pakistan’s long-term average inflation of 8 per cent. For the fiscal year 2023/24, it is anticipated to clock-in at around 10 per cent.

The forecast is based on an increase in the base electricity tariff by Rs7.9/unit, or 45 per cent, in July 2022; an increase in gas prices by 45 per cent in July 2022; Arab light oil price assumption of $100/bbl in the fiscal year 2022/23 and $87/bbl in the fiscal year 2023/24: and 5 per cent annual depreciation in the rupee value in the next two fiscal years.

With all the abovementioned variables at play, even a simple sensitivity of MoM rise in the CPI index indicates that the inflation would remain elevated during the next few months and much higher than historical averages.

Read more: Imran says imported govt has increased inflation many folds in just three months

Many observers try to compare the current situation to 2008 when inflationary pressures surged significantly driven mainly by the global financial crisis. During that period, the prices remained elevated for a prolonged period of time, as inflation stood in excess of 15 per cent for 13 months from April 2008 to April 2009. In October 2008, it peaked at 25 per cent where FY09 average inflation stood at 21 per cent.

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The current situation of the rising CPI inflation trend is also somewhat similar to what was seen during 2010, where inflation remained at around 15 per cent for the four consecutive months from September 2010 to December 2010 with an average FY11 inflation clocking-in at 14 per cent.

In the last 20 years, the average policy rates remained around one per cent over and above the average inflation rates. Besides, six-month T-bills rate remained at par with the inflation rates.

The real rates are not only a function of the existing inflation rates but are also dependent on its outlook.

Based on the past data, the policy rate has also remained 30 basis points on an average over and above the inflation expectations of the next year, whereas the T-bills rate remained 50 basis points below inflation estimate for the next year.

This is also evident from the current six months T-bills rate, which stands at 15.2 per cent versus the inflation expectations of around 16 per cent for the next fiscal year.

During the months of high inflation (in excess of 15 per cent+), the real interest rates remained negative. From April 2008 to April 2009, the real rates on an average remained at around -8 per cent, as the policy rates peaked at 15 per cent in November 2008, despite monthly inflation of 25 per cent.

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Similarly, the real interest rates averaged -1.5 per cent from September 2010 to December 2010, where the policy rate peaked at 14 per cent in December 2010. This is due to the market participants view that the CPI will gradually cool down.

Read more: State Bank of Pakistan likely to raise interest rates today

In the fiscal year 2022/23, similar trend is likely to prevail, where the real rates are anticipated to remain negative for a few months. However a 100 to 150 basis points increase in the policy rate cannot be ruled out.

The State Bank of Pakistan (SBP) has cumulatively increased the policy rate by 675 basis points during the last one year and by 400 basis points in 2022 to-date. This is the highest policy rate increase after 2008 when the policy rate was raised by 500 basis points in a calendar year.

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