KARACHI: With sharp surge in local petrol prices, currency devaluation, and expected adjustments in power and gas tariffs, there are signs of significant uptrend in inflation going ahead, experts said. Sensitive Price Index (SPI), which is an indicator used to measure weekly price movements of essential consumer items, was up 3.38 percent on week-on-week basis (28 percent on year-on-year) during the week ending June 16, 2022 versus last 10-year average weekly increase of 0.2 percent. This is the highest increase in over a decade, they added.
“For June 2022, CPI inflation is likely to remain in the range of 18.5 percent-19.5 percent on YoY basis (3.9 percent-4.8 percent on MoM basis)”, Umair Naseer at Topline Securities said.
Pakistan is also anticipated to witness a streak of 15 percent plus inflation for the next 4-6 months where it is anticipated to peak at 21 percent in August 2022, he said. In FY23, average inflation is likely to be around 15.5 percent-16.5 percent compared to Pakistan long term average inflation of 8 percent. For FY24, it is anticipated to clock in at 10 percent, he added.
“The key assumptions to our thesis include increase in base electricity tariff by Rs 7.9/unit or 45 percent in July 2022; increase in gas prices by 45 percent in July 2022; Arab light oil price assumption of US$100/bbl in FY23 and US$87/bbl in FY24 and 5.0 percent annual devaluation in FY23 and FY24”, Umair Naseer said.
With all the above mentioned variables at play, even a simple sensitivity of MoM rise in CPI index indicates that inflation would remain elevated during the next few months and much higher than historical averages, he added.
Many observers try to compare the current situation to 2008 when inflationary pressures surged significantly driven mainly by global financial crisis. During that period, prices remained elevated for a prolong period of time as inflation stood in excess of 15 percent for 13-months from April 2008 to April 2009. In October 2008, it peaked at 25 percent where FY09 average inflation stood at 21 percent.
Current situation of rising CPI trend is also somewhat similar to what was seen during 2010 where inflation remained at around 15 percent for four consecutive months from September 2010 to December 2010 with average FY11 inflation clocking at 14 percent.
In the last 20-years, average policy rates have remained around 1.0 percent over and above the average inflation rates. On other hand, 6-month T-bill rate have remained at par with inflation rates. Real rates are not only a function of current inflation rates but are also dependent on inflation outlook.
Based on past data, Policy rate has also remained 30bps on an average over and above inflation expectation of next year whereas T-Bill rate remained 50bps below inflation estimate for next year. This is also evident from the current 6-months T-Bill rate which stands at 15.2 percent versus inflation expectations of around 16 percent for FY23, he said.
It is also interesting to note that during months of high inflation (in excess of 15 percent plus), real interest rates have remained negative. From April 2008 to April 2009, real rates on average remained at around negative 8 percent as policy rates peaked at 15 percent in November 2008 despite monthly inflation of 25 percent. Similarly, real interest rates averaged negative 1.5 percent from September 2010 to December 2010 where policy rate peaked at 14 percent in December 2010. This is due to market participant view that CPI will gradually cool down, he added.
“In FY23, we expect similar trend where real rates are anticipated to remain negative for few months. However a 100-150bps increase in policy rate cannot be ruled out, we think”, Umair said. It is also worth mentioning that SBP has cumulatively increased policy rate by 675bps during last one year and by 400bps in 2022 to date. This is the highest policy rate increase after 2008 when policy rate was raised by 500bps in a calendar year.
“Dr. Omar Farooq, Director Monetary Policy and Research SBP, in a recent Podcast also stated that monetary policy transmission mechanism takes at least 12-18 months to complete. Hence, we believe that SBP would try to assess the impact of its key monetary tightening measures before making further adjustments in rates.”
Copyright Business Recorder, 2022
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