The headline inflation inched up again. It stood at 29.2 percent in November 2023 and the monthly increase stood at 2.7 percent – highest since July 23. The higher increase is mainly due to staggering increase in gas prices among urban areas which are up by 280 percent (MoM) and 520 percent (YoY). Other than gas, overall inflation is moving on a downward trajectory –though food inflation is up by 1 percent (MoM) mainly due to the increase in perishable items.
The massive increase in gas prices (mainly due to limitation of the methodology) has revised up the inflation estimates by two percentage points for the next twelve months, and the full year inflation in FY24 is now expected at 25 percent, and the 5MFY24 stood at 28.6 percent.
This higher inflation number is forcing analysts to revise their expectations of rate cuts, as majority now expect SBP to maintain the status quo in the upcoming monetary policy, and it would be a wise decision, as keeping12M forward-looking real rates positive is imperative for stability in the currency market.
The interesting outcome is that now urban inflation is higher than the rural. Since the start of 2021, rural inflation was consistently higher than the urban, and now is the other way round, as gas price increase has no impact on rural, but have a very significant impact on urban, as pipeline gas is mainly an urban phenomenon.
The urban inflation stood at 30.4 percent in Nov 23 and on monthly basis it is increased by 4.3 percent whereas the corresponding rural numbers are 27.5 percent and 0.4 percent respectively. In the case of food, both urban and rural are converging, at 29.8 and 29.2 percent respectively, and have a similar monthly increase. However, the rural core inflation is still higher than urban; but both are moving down.
The food inflation uptick in the last month at 1 percent is not good; but its mainly due to perishable items – on monthly basis, tomatoes are up by 60 percent, potatoes by 15 percent and onion by 12 percent.
The biggest increase is in housing and utility sector where in urban sector the monthly increase is 17 percent, and the yearly is at 40 percent. There is nothing else of significance, apart from gas where the increase is more numbers than in actual – for example, due to the glitch in methodology, the increase in fixed charges from Rs10 to Rs400 in protected consumers have a profound impact in numbers. Other than gas, electricity charges are down by 10.7 percent monthly, which is due to removal of PHL charges which may reappear again next month to post a higher increase.
The other notable hike is in clothing and footwear where the increase is 2.3 percent MoM and 21 percent YoY. In this segment, consistent rural inflation is beating the urban counterpart. Then the biggest fall is in the transport sector, which is down by 2.8 percent MoM and yearly increase is at 26.5 percent. Thanks to the falling petroleum prices due to pressure on the global oil prices and stable currency.
The overall inflation is likely to calm down in the next 12 months given the international commodity prices are to remain at current levels or below, and the currency will remain stable. And that may finally tame the inflation and bring it close to SBP’s medium-term target in FY25.
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