Falling world oil prices, stable PKR to keep inflation low

Low pace in inflation is likely to continue on the back of falling international oil prices and stable PKR against USD. According to a research report of InvestCap, the recently released CPI figure for Sep-14 settled well above the proximity to market consensus. The CPI for the month of Sep-14 stood at 7.68 percent YoY as compared to market consensus of 7.25 percent YoY and 7.0 percent YoY in Aug-14.
During 1QFY15, average CPI clocked in at 7.52 percent as compared to 8.06 percent in the same period last year. Core inflation as measured by non-food non-energy CPI reached 8.1 percent in Sep-14 as compared to 7.9 percent in Aug-14. On a monthly basis core inflation increased by 0.7 percent in Sep-14 as compared to 1.5 percent in the same period last year.
Commenting on the inflation outlook, Abdul Azeem, an analyst at InvestCap, said going forward low pace in inflation is anticipated to continue on the back of falling international oil prices and stable PKR against USD. "We expect in near term vegetables and fruit prices are expected to fuel up the food inflation amid floods in Punjab," he added.
Moreover, the delay in realising the foreign inflows in near future could exert pressure on PKR therefore depreciation in PKR would increase the prices of imported items, he added. The declining capacity utilisation of different industries on acute power outages is creating further pressure on the supply side which may result in either increase in imports or increase in the prices of locally manufactured products.
However, he said any increase in CPI ahead of flood and expected depreciation in Pak rupee will be temporary and overall CPI will remain on slow pace. "Although, we expect 8 to 8.25 percent inflation during FY15 but a sudden movement in these factors could affect the estimated CPI forecast," Azeem said. During Sep-14, transport services (weight 2.7 percent) and tomatoes (weight 0.43 percent) were the major items causing increase in CPI. The same posted a significant surge of 8.52 percent MoM and 33.88 percent MoM respectively on account of floods on 2.5 million acres of land.
Moreover, pipe fittings 9.29 percent, vegetables 6.07 percent, sugar 5.14 percent, fiber crops 4.17 percent, ceramics & sanitary fixture 3.16 percent, electric wires 3.13 percent, quilts 3.02 percent, milk & and cream in solid forms 2.46 percent and timber 2.31 percent were other main components which pulled CPI up during Sep-14.