July inflation more likely to settle at 11.23% YoY compared to 5.83% in Jul’18 and 8.89% in Jun’19, respectively. The uptick in CPI is expected on the back of increase in gas tariff by an average of 70%. which will likely contribute 141bps to overall CPI (previous gas price hike was witnessed in Oct’18 by an average of 85%), surge in electricity prices by an average of 15% which is expected to add 75bps to the overall CPI (previous electricity tariff was revised in Jan’19 by 8.5% on average), and increase in quarterly house rent index by 2% YoY.
On a yearly basis, increase in inflation will likely be led by Alcoholic Beverages & Tobacco (+24.8% YoY), Housing (+19.3% YoY), and Transport (+11.1% YoY). On a MoM basis, CPI reading is expected to increase by 3.10% attributable to surge in Housing Index (+10.03% MoM), Health index (+1.99% MoM) and Clothing & Footwear Index (+1.20% MoM).
As per four weeks Sensitive Price Index (SPI) data published by the Pakistan Bureau of Statistics (PBS), average prices of Potatoes, Eggs, Milk Powder, Fresh Vegetables, Pulse Mash, and Pulse Moong are expected to register a jump of 12%, 8%, 6%, 6%, 4% and 4% MoM, respectively.
On the other hand, decline in prices of essential food items like Fresh Fruits (-21% MoM), Chicken (-8% MoM) and Onions (-4% MoM) is expected to keep the food index restrained. Analysts at Arif Habib Limited expect the inflationary momentum to linger on in 1HFY20 on account of higher utility prices (Gas prices rose by 70% on average and electricity tariff increased by 15% on average) along with the impact of the sharp slide of PKR against greenback is likely to intensify pressure on inflation as food related products, clothing materials, health and transport are directly correlated with import parity.
However, the analysts expect inflation to slow down considerably in 2HFY20 primarily due to absence of one-off adjustments such as hike in utilities’ prices. On monetary policy front, on last rate hike was final given a softening inflation outlook going forward. Inflation is expected to peak in Sept’19 to 12.1%, while, average inflation for FY20 is expected at 10.5%. Moreover, SBP has also revised down average inflation for FY20 to a range of 11%-12%.