Inflation in June likely to peak to highest level in a decade

• Analysts suggest inflation will rise in range of 18.1-19.5% in June year-on-year.
• Increase to be recorded due to sky-high food and energy prices, and currency devaluation.
• Financial pundits reinforce expectations SBP will raise its key interest rate.

KARACHI: Inflation, based on the consumer price index (CPI), is expected to soar to over a decade high in June owing to sky-high food and energy prices and massive currency devaluation, The News reported Friday.

Analysts and financial pundits reinforced expectations that the State Bank of Pakistan (SBP) will raise its key interest rate for the sixth consecutive time in its next Monetary Policy Committee meeting scheduled to be held on July 7.

They suggested monthly inflation will rise to the range of 18.1-19.5% in June on an annual basis, from 13.8% in May. That would be the highest reading since 2009.

Elaborating further, analysts said that the June CPI is expected to rise almost by 20% based on recent changes in prices of fuel and other commodities and “the current situation has been compared with the 2008 situation following the global financial crisis”.

The government twice slashed unfunded fuel subsidies to control fiscal deficit and secure the International Monetary Fund (IMF) bailout programme since the last week of May. It raised petroleum product prices by Rs60/litre and also increased electricity tariffs. 

The government has so far passed on the subsidy burden to the masses by announcing more than Rs84/litre (56%) increase in petrol prices and a Rs119/litre (82%) increase in HSD prices in almost four weeks.

The SBP has cumulatively increased the policy rate by 675 basis points (bps) during last year and by 400 bps in 2022 to date. This was the highest policy rate increase after 2008 when the policy rate was raised by 500 bps in a calendar year.

Situation 'somewhat' similar to 2010

Topline Securities analyst Umair Naseer said the country would witness a streak of more than 15% inflation for the next four to six months, peaking at 21% in August 2022.

“For June 2022, CPI inflation is likely to remain in the range of 18.5-19.5% on a year-on-year basis (3.9-4.8% on a month-on-month basis) as per our estimates.”

Naseer said in the fiscal year 2023, average inflation would likely be around 15.5-16.5% compared to Pakistan’s long-term average inflation of 8%. He expects FY24 CPI would clock in at 10%.

Read more: Petrol price reaches record high of Rs233.89 in Pakistan

The key assumptions behind these projections included an increase in base electricity tariff by Rs7.9 per unit or 45% in July 2022; 45% hike in gas tariff in July 2022; an Arab light oil price assumption of $100 per bbl in FY23 and $87 per bbl in FY24; and 5% annual devaluation in FY23 and FY24.

“Current situation of rising CPI trend is also somewhat similar to what was seen during 2010 where inflation remained at around 15% for four consecutive months from September 2010 to December 2010 with average FY11 inflation clocking at 14%,” Naseer added.

During the 2008 period, prices remained elevated for a prolonged period of time, as inflation stood in excess of 15% for 13 months from April 2008 to April 2009. In October 2008, it peaked at 25% where FY09 average inflation stood at 21%.

Food inflation rises for 5th consecutive time

Analyst Arslan Siddiqui of Optimus said inflation would reach at over a decade high in June 2022 and the CPI is estimated to clock in at 18.1% year-on-year.

“On a sequential basis, CPI was estimated to sharply surge by 3.5% mainly led by a jump in motor fuel prices by 40.6%, continued food inflation of 3.1% month-on-month, and higher electricity prices,” Siddiqui said. “Along with elevated energy prices, rupee devaluation and commodity prices.”

Core inflation was estimated to increase to 11.1% year-on-year with a month-on-month uptick of 1% in CPI.

Read more: NEPRA raises basic electricity tariff by Rs7.9 per unit

Siddiqui noted that food inflation, which weighed 34.6% in the inflation basket, had risen for the fifth consecutive time. It increased 3.1% month-on-month, mainly due to an 8.4% hike in prices of fresh milk, 6.1% increase in cooking oil, 22.3% spike in egg prices, and increase of 30.8%, 11.5%, 9.6%, and 9.8% uptick in prices of potatoes, tomatoes, pulses, and rice, respectively.

However, wheat and wheat flour prices were expected to dip on a monthly basis amid a downward price trend in the past few weeks. “We believe, increase in hi-speed disease prices by Rs60 per litre and elevated import parity prices are the primary reasons of food inflation,” the analyst said.

Amreen Soorani of JS Global expects June 2022 CPI to clock in at 19.2%, with a month-on-month increase of 4.53%; substantially higher than the 11MFY22 average CPI of 11.26% and May 2022 reading of 13.76%, owing to higher fuel and food prices.