CPI-based inflation estimated at 8.3% in August

KARACHI: The Consumer Price Index (CPI) for August 2021 is estimated to reach 8.3 per cent Year-on-Year (YoY) against 8.4 per cent YoY reported in July 2021.

Analysts at Insight Research said on Monday, the CPI is estimated to inch up 0.5 per cent on a Month-on-Month (MoM) basis.

The muted inflation number during the month is premised from relatively soft food prices under the Sensitive Price Indicator (SPI) basket. However, around 5.4 per cent rise in fuel prices have resulted in 2.9 per cent increase in the transportation index. Both urban and rural CPI are estimated to reach 8.3 per cent YoY.

Within the SPI basket, cooking oil (up 2.3 per cent), vegetable oil (up 3.6 per cent), tomatoes (up 20.2 per cent), motor fuel (up 5.4 per cent) and liquefied petroleum gas (up 12.8 per cent) witnessed an increase in prices on MoM basis, which resulted in higher inflation.

This was further contributed by an increase in the electricity tariff (0.5 per cent) due to the monthly fuel cost adjustment. However, soft food prices have counter-balanced the rising impact on inflation: chicken (down 14.3 per cent), eggs (down 1.9 per cent) and pulses (down 5 per cent).

The average CPI for FY22 is estimated to remain well within the State Bank of Pakistan (SBP) guidelines of 7.5 per cent to 8.5 per cent.

Going forward, inflation outlook remains uncertain, given some upside risks that may raise the inflation forecast. These factors included rise in fuel prices, upward adjustment in electricity and gas tariffs and abrupt food prices.

“As per our back of the envelop working, every 5 per cent increase in tariffs of both electricity and gas would result in 25bps increase in the base CPI estimates.”

“Nevertheless, its spillover impact could be much higher. In the absence of the above reasons, we expect [the] policy rate adjustment to take place in the November 2021 Monetary Policy Committee (MPC) meeting with a 50 basis points hike. However, escalating worries on account of rising trade balance may result in upward adjustment in [the] policy rate earlier than estimated,” the analysts said.

The central bank is scheduled to hold an MPC meeting in September 2021; wherein, the central bank is likely to keep the policy rate at 7 per cent. As it is evident in the graph, the real interest rate is expected to converge towards a mildly positive range by the end of this calendar year (assuming electricity and gas tariffs remain unchanged or marginal increased).