Food inflation to reach 12.3% in December

KARACHI: The headline inflation for December 2021 is likely to rise up to 12.3 per cent, despite soft food prices, analysts said on Tuesday.

The analysts at Insight Securities said that despite soft food prices, the inflation based on the Consumer Price Index (CPI) for December 2021 will arrive at 12.3 per cent on a year-on-year (YoY) basis against 11.53 per cent reported in November 2021, taking the first half of FY22 average to 9.8 per cent, while on a month-on-month basis, the CPI inflation remained flat.

Similarly, urban CPI is estimated to reach 12.5 per cent YoY, while rural inflation is expected to arrive at 11.9 per cent YoY. Low base effect, surge in housing, transport and health index have diluted the impact of muted food prices; wherein, a decrease in chicken, wheat, tomato and sugar prices are the key highlights during the month.

Within the Sensitive price Indicator (SPI) basket, the following items witnessed an increase in prices on a MoM basis: pulses (6 per cent); edible oil (3.3 per cent), fresh milk (1 per cent) and electricity charges (9.5 per cent), resulting in higher inflation.

Correspondingly, the prices of the following items have counteracted against inflation, wheat (2 per cent), chicken (27.5 per cent), eggs (3 per cent), sugar (5.5 per cent), potatoes (19 per cent), tomatoes (46.6 per cent) and onions (16.6 per cent).

The analysts foresee inflation in the second half of the current fiscal year to remain high, averaging around 12.3 per cent and expected to peak in January/February to over 13 per cent.

The analysts said that the full-year average inflation for the current fiscal year will remain at 11 per cent YoY against 8.9 per cent in FY21, while expecting a single-digit inflation thereafter.

The State Bank of Pakistan (SBP) cumulatively increased the policy rate by 275 basis points during 2021. Despite these actions, the real interest rate is still hovering at negative 2.5 per cent.

Keeping a view of inflation trajectory, we think that the policy rate can further increase by 50 to 75bps to peak at 10.50 per cent to 11 per cent during CY22 to achieve mildly positive real interest rates. “Our estimates suggest that a positive real interest rate will be achieved in the 4QCY22 [fourth quarter of CY22].”

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