The CPI inflation reading is finally lower than the policy rate. The headline number stood at 20.7 percent on Mar-24, highest since May-22, and 9MFY24 average reading is at 27.1 percent. Inflation is coming down due to the high base effect last year and the decline is likely to continue as April recording would be around 18 percent.
Having said that, inflationary worries are not over yet. The troublesome indictor is continuation of high month-on-month number – headline is up by 1.7 percent and the increase in food is at 2.9 percent. It seems MoM is back with a vengeance and diluting the expectations of rate cut.
One may argue that food inflation is high due to Ramadan where the demand of food – especially, perishable items go disproportionately up, and this sudden jump is otherwise a blip. If that is the case, the food inflation MoM increase should be down next month.
As of now, the perishable items are going crazy- up by 22.7 percent MoM in March. Price growth of tomatoes, onions, potatoes, fresh fruit and fresh vegetables is in double digits in just a month – of course many of these would be on your dining table at Iftar.
The good news is that prices of non-perishable food items slightly dipped on monthly basis (down by 0.4%) in March 24. And due to this and the base effect, the yearly increase is reduced to 17.1 percent – lowest since May 22.
The food inflation is relatively lower in urban areas (urban at 16.6% vs rural at 17.1%) while it is the other way round in non-food inflation (urban at 25.8% vs rural at 21%). The hit of energy prices increase – especially gas, is more pronounced in urban dwellings. Nonetheless, the core inflation is lower in urban at 12.8 percent as compared to rural at 20 percent which suggests that wage prices and second round impact is more visible in rural than urban.
The festivity related inflation is not confined to food only, as clothing and footwear are up by 1.65 percent MoM whereas tailoring is up by 3.4 percent.
The housing and utility index which is the second biggest contributor to inflation after food is up by 1.5 percent MoM and the yearly increase is at whopping 36.6 percent. Within it, the highest monthly increase is in electricity charges at 5.1 percent due to higher FCA of Rs7.1/unit in March.
The transport index marginally fell on monthly basis as transport services are down by 6.4 percent in urban areas while the decline is subdued at 1.8 percent in rural areas. This is despite the fact the motor fuel prices were slightly up. Overall, the yearly increase in the transport sector is at a modest 8.4 percent. There are risks in this segment, as fuel prices are up in April and going forward, higher tax imposition on petroleum in the next budget cannot be ruled out.
Thus, the risks of energy related items – higher taxes on petroleum, upward revision in electricity base tariffs and upward sticky international oil prices are risks to otherwise falling inflation.
Analysts expect inflation to come down further in April to around 18 percent. The real rates are already in green based on March figures and the positivity to increase in April. This calls for a rate cut on April 29 th announcement as by then SBP would have access to April’s inflation numbers.
The question is what will the decline be. Whether 100bps or 200 bps, the monthly change in April would be an important indicator. To manage the current account balance around zero and ensure the currency does not fall significantly, a cautious approach is warranted, and SBP should keep real rates positive, going forward.