The headline is that the headline inflation is finally below 20 percent. It stood at 17.3 percent for April 24 – the lowest since May 22. Twenty percent plus inflation for the last two years tells a lot about the misery the common man went through in managing the expenses. The purchasing power has eroded, and the economy is dead slow. And finally, the disinflationary trends are visible in non-perishable food items.
10MFY24 average inflation is recorded at 26 percent, and the full year is likely to close at 24-25 percent with the next two months inflation expected to hover around 15-18 percent, while a gradual decline is expected going forward. The base effect and disinflationary trend in food items, falling international commodity prices, relative stability in the currency (no big shock is anticipated), and suppressed demand (due to SBP’s strategy to keep real rates positive) will keep the inflation below 20 percent.
The energy pricing risk is likely to remain high due to higher international oil prices (read geopolitical tension), and persistent inefficiencies and legacy costs in the power sector. This would limit the downward journey of inflation.
However, the worst is behind us. The numbers are demonstrating it. Food inflation is in the single digits – at 9.7 percent and is down by 2.4 percent monthly. Wheat and flour price-fall lies at the top – down by 9-10 percent in urban areas, and the decline is more in rural settings. And SPI numbers suggest that the fall will continue in May. Short of a supply shock due to weather conditions or abnormal rise in fuel prices, food items will continue to contribute to the disinflationary trend in the near term. Prices of perishables such as onions, tomatoes, and poultry remain abnormally high but could help bring Food-CPI down significantly if supply conditions improve.
The prices of sugar and cooking oil are showing falling trends while the rate of increase is peaking in milk and some other products. The stable currency, higher interest rates, falling global food prices, and lower demand are contributing to the falling inflationary trends in food.
The core inflation – on the other hand, is not coming down at a similar pace. However, the increase has been minor. It stood at 15.6 percent in April 2022, while its peak was 22.7 percent in May 2023. The core inflation is up by 2.1 percent month-on-month in April. One reason for the higher core is a quarterly adjustment in house rents (which happens after every four months).
Then there are other pressures – notable monthly increases are in clothing and footwear (urban is up by 6.5% MoM), and education (rural is up by 12.7%). The increase is due to the seasonal pressure of Eid for the former and the new year starting in the case of the latter. Anyway, a higher increase suggests a second-round impact of passing on the energy prices increase and revision in wages.
Thus, core inflation may not fall at a similar speed and the second round and seasonal impact will likely keep on coming in various sectors.
Where does it go from here? The key is to look at the next budget and the new IMF program. There might be withdrawal of exemptions in the sales tax and imposition of new taxes which would have inflationary consequences. Then the currency may adjust due to the clearance of pending payments and the ending of import restrictions. And thirdly, it is important to look at the power sector base price revision.
Analysts are expecting moderate depreciation and an increase in energy prices, and even with these, the consensus is of around 15-17 percent inflation in FY25. The disclaimer is that these analysts (and SBP) were proven wrong in forecasting inflation in the last two years.
Hence, do not expect any monetary easing – as real rates may remain positive on a spot basis. And even on that count, the first-rate is not far.
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