The CPI clocked in at 9.1 percent in May, slightly lower than market expectations. The 11 month average stood at 7.2 percent and the full year average inflation is expected at 7.3-7.5 percent - highest in 5 years. In the first year of PML-N term (FY14) the CPI averaged at 8.62 percent. The core inflation stood at 7.2 percent in
May 2019 and 11MFY19 average came at 8.0 percent versus 8.2 percent in FY14
Purely based on inflation, the PTI first year turned out better than PMLN's; but that is not a good comparison. In FY20, inflation would be surely higher than the outgoing year. The inflation dragon is expected to come out post budget and after energy price revision. The headline inflation is all set to peak in Jul-Sep, and it will start tapering off. It is hard to put a number at this point as the end of tax exemptions and revision on energy prices on different slabs are not clear as of now.
In the outgoing year so far (11 months), prices have responded well to the currency adjustment and to higher international oil prices. The PKR/USD parity dipped by 23 percent from average of Jul-MayFY18 to Jul-MayFY19, while the Brent crude is up by 10 percent in the same period. Seeing this, the CPI average of 7.2 percent is decent.
One reason for relatively low inflation is the slowdown in economic demand owing to monetary tightening and currency adjustment. The other reason is that currency was not at its equilibrium and domestic goods were cheaper to international prices, and now with REER at its equilibrium, prices are closer to international parity. Caution: Any further depreciation can have adverse inflationary consequences.
Even this 7.2 percent 11M average is skewed as the gas price increase of 85 percent earlier this year was not correct as the PBS had used simple average for all the slabs. Had weighted average been used, the CPI could have been lower by a few bps.
Inflation in coming months will depend a great deal on how the government decides to pass on the electricity and gas prices for different slabs. Another 200 percent increase in gas prices could be a case as was recommended by OGRA, and this could alone take inflation straight into double digits. However, if the change is applied with common sense and care. the impact could be much less. (read Gas prices - CPI perspective and Gas prices: U-turn calling)
In case of electricity prices, the FM has ensured that consumers below 300 units consumption per month will not face price hike. A rough estimate suggests that the impact of electricity price increase on CPI would be 8-10 percent, and with its weight of 4.4 percent, its impact on CPI would be 0.4-0.5 percent at the time of increase.
Thus, if gas prices are handled with care, the issue would remain about the changes in budget such as likely increase in GST, end of exemptions on fertilizer, clothing etc. Given all these, if the currency remains in band of PKR/USD145-155, inflation will peak around 12-13 percent in Sep19 and the full year average would be around 10-11 percent.
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