According to analysts at JS Global, Pakistan’s headline inflation based on the Consumer Price Index (CPI) is expected to reach a new peak in May 2023, despite a reduction in petroleum prices during the month.
The analysts predict that the inflation rate will rise to a record-high of 37.27 percent, with a sequential increase of 1.07 percent on a month-on-month (MoM) basis. Although this increase is lower than the average 3.3 percent MoM increase observed in the past four months, it is closer to the usual 0.9 percent MoM increase seen during ordinary times. The projected figure would bring the year-to-date headline CPI for the first 11 months of FY23 to 29.03 percent.
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The recent decline in petroleum prices is not expected to have an immediate impact on the May 2023 inflation readings. The analysts noted that if the reduction in petroleum prices were taken into account, their estimates would decline by 10 basis points (bp).
The surge in inflation is primarily driven by a significant increase in food prices, which account for approximately 30 percent of the CPI basket. The analysts anticipate that food inflation will reach around 48 percent year-on-year (YoY) this month, with a sequential increase of 0.81 percent MoM. This marks a slowdown from the recent average monthly increase of around 4.5 percent seen over the past four months.
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The analysts expect the May 2023 inflation reading to represent the peak, as the year-on-year trend is projected to soften in the following months due to the base effect from June 2023.
“With an expected average FY23E CPI of 29 percent, we anticipate a monthly average trend of 90 bp, resulting in an average FY24F CPI of 20 percent,” stated the analysts. They further mentioned that non-food non-energy (NFNE) core inflation is expected to decline from 20.4 percent YoY in FY23E to 14.8 percent YoY in FY24F.
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These trends are also anticipated to lead to monetary easing in the second half of FY24. The analysts highlighted that the CPI, on a 12-month forward basis, is estimated to average at 23.6 percent, indicating negative real interest rates of around 250 bp from the current policy rate of 21 percent. On an 18-month forward basis, the average CPI is projected at 19 percent, reflecting positive real interest rates of 200 bp.
