The CPI stood at 8.2 percent in August 2020 as compared to 9.3 percent in July. On monthly basis, the increase is receded at 0.6 percent in Aug versus 2.5 percent in July. The urban inflation is at 7.1 percent and rural at 9.9 percent in August. Although, the monthly increase in rural (0.4%) is less than urban (0.6%) in August, the gap between rural and urban inflation widened in July; and its impact is visible in August numbers (and will continue to do till June-21).
The food inflation eased relatively in August. The perishable items fell by 9.8 percent on monthly basis while non-perishable food items increased by 0.8 percent. The increase in non-perishable like wheat (12%) and sugar (13.5%) are hard to be scaled back. It is also taking a heavy toll on the government in political terms. There is cascading into bakery and confectionery prices (6.7%). The worrisome fact is increase in milk prices (4.8%). Milk and dairy products are one fourth of food inflation.
Transportation index is up by 3 percent on monthly basis. Transport services and motor fuel both increased noticeably. Electricity charges are up by 11.6 percent on account of Nepra’s decision to finally announce the long pending monthly fuel price adjustments. The adjustments for eight months till June 2020have been clubbed in two months. The electricity prices for CPI computation in September should show negative trend year-on-year, based on an upwards adjustment of Rs1.8/unit for the period last year.
Seeing SPI trend, September inflation could be around 8 percent. Thereafter, the base effect will come in play. But due to July abnormal hike, the base effect impact would be diluted than what analysts were predicting earlier. The outlook is dependent upon the decision on pending increase in electricity prices. The IMF review is stuck. Government is in process of negotiating on generation side, soon the workable roadmap of energy, particularly to resolve circular debt, is to be presented.
In case of no increase in energy prices, inflation may hover around 7-8 percent in FY21. The secondary market yields have inched up in the last month. 6M paper is trading at 7.17 percent. Seeing this, the monetary policy committee may keep rates unchanged. This time in MPS, the SBP would do well to provide an outlook of the economy post COVID.
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