CPI inflation clock-in at 21.3% YoY

The Consumer Price Index (CPI) inflation for June 2022 surpassed the estimates to clock-in at 21.3 per cent YoY, touching the highest level since December 2008 (23.34 per cent). This brought FY22 to an end with the CPI averaging at 12.1 per cent.

With a monthly increase of 6.3 per cent, the key reasons of the high inflation reading were Rs100/litre increase in the prices of the petroleum products and the ongoing sticky food inflation.

The perishable food items led the inflation in the food basket. The food inflation clocked-in at 24 per cent and 27 per cent for urban and rural regions, respectively, averaging at 13 per cent for FY22.

The urban non-food non-energy (NFNE) inflation reading for the month entered the double-digit zone, clocking-in at 11.5 per cent, while the rural NFNE reported the double-digit inflation for the fourth consecutive month, at 13.6 per cent.

The Wholesale Price Index (WPI), the indicator measuring price trends of goods before sold at retail, has crossed the high mark during the global financial crisis, reaching 38.94 per cent in June 2022. This reflects much pressures in the economy, where some, if not all, will be passed on to the consumer prices.

The existing CPI number reflects the real interest rates expanding to south of -700bps, where our base case assumptions project a similar trend to continue till October 2022.

Our base case incorporates Rs7.5/unit increase in the power tariff, gradual increase in the petroleum levy and the general sales tax (GST) and a month-on-month increase of 0.7 per cent (higher than historical average of 0.6 per cent MoM, incorporating the second round of inflation from higher energy costs, leading to the CPI averaging over 18.8 per cent in FY23.

For perspective, the CPI base is high enough for it to average at 15 per cent even in the best-case scenario where one does not incorporate any increase in the petroleum products price increase or other one-time energy cost hike from here onwards and only takes a 0.5 per cent MoM uptick for the whole of FY23.

We believe the State Bank of Pakistan (SBP) would continue a hawkish monetary policy stance to arrest the sharp rise in the consumer products prices and slow down the overheated economy, leading to our expectations of at least another 100bps increase in the policy rate this week.