The headline inflation is down to a 20-month low (since June 22) at 23.1 percent in Feb 24, and still only in five months (between 1976 to 2021); the inflation was higher than the latest recording. This tells that how horrible the last twenty months have been. Nonetheless, it’s a relief to see the monthly inflation remained flat, and the food inflation is down by 1.6 percent – 26 months (about 2 years) highest drop.

Yet, the big dip in the food inflation is offset by a 1.8 percent rise in the housing and utility index due to another hike in the gas prices and 2.1 percent month-on-month increase in the transport index. The second-round impact of these along with the Ramzan effect is likely to push the food prices up again.

The food index is down mainly due to perishable food items -down by 5.4 percent month-on-month where prices of 24 food items out of 39 are down – eggs are down by 32 percent; tomatoes by 25 percent; and onions by 8 percent. The non-perishable food index dipped by 1.3 percent month-on-month where the biggest decline is in tea prices – declined by 7.9 percent – thanks to falling international prices and stable PKR.

The issue is that the energy prices are not keeping calm. In the last 18-24 months, inflation was high due to the global commodity Super cycle and free fall of the PKR. Now with the stable PKR and falling commodity prices, finally the second-round impact of earlier catastrophe is coming to end. But the energy circular debt is not taming, and due to lack of structural reforms, the only option for government to comply to the IMF is to pass on the burden to the consumers. And that is creating doubts about lower inflation forecasts by analysts’ community.

In Feb on a month-on-month basis, gas charges were up by 10 percent; motor fuel was up by 3.5 percent; and electricity charges by 0.9 percent. There is more to come. With international oil prices being upward sticky (due to Russian exports ban on gasoline) and expected rounds of power tariff revision in months to come, the energy related inflation may not tame. And these may have second round effects.

Then recently, the gas prices have moved up for fertilizer companies and these could have an adverse impact on the food inflation in the upcoming argi seasons. These risks limit the ease in the inflation due to base effect.

Nonetheless, core inflation is down to 18.1 percent – the lowest in 12 months. The fall is pronounced in urban areas where core stood at 15.5 percent in Feb 24. Anyhow, the direct impact of food inflation (due to higher fertilizer prices) and energy prices (due to inability of government to curtail the circular debt) doesn’t reflect in core inflation, but the possible second round could have a dent.

Provided the currency to not slip out of bounds, the inflation outlook is getting better due to the base effect and is likely to be below 20 percent in the coming 2-3 months. If the next two months reading (March and April) are closer to what the market is expecting, SBP may cut rates by 2 percentage points by April end.