CPI Outlook: Downside for Nov-12, upside risk for 2HFY13


Downward bias in November 2012 CPI…

With (1) SPI (Sensitive Price Index) for the week ending 22nd November clocking in 0.07% lower WoW; and (2) no decision taken so far to reverse the 35% cut in CNG prices announced end October 2012, we flag downside risk to our 8.4% estimate for November 2012 CPI. Recall in October 2012, the Supreme Court prescribed Rs30/kg (~35%) reduction in CNG prices to current level of Rs54-61/kg. While CNG pricing mechanism is still being debated, we estimate that if the same is incorporated in November 2012 CPI calculation, it will lower CPI by ~30bp where weight of motor fuel is 3.03% and CNG is ~22% of transport fuel. Factoring in both lower vegetable prices (sharp MoM decline visible in November 2012 SPI statistics), and the reduction in CNG prices, we estimate that November 2012 CPI could surprise on the downside at 7.9-8.0%.

…likely to buoy December 2012 rate-cut hopes

The above coupled with last week’s retrospective revision of October 2012 Core CPI number, are likely to keep rate-cut anticipation high ahead of December 2012 Monetary Policy Statement (MPS) in our view. Note that last week, Pakistan Bureau of Statistics revised down October 2012 Core Inflation (Non-Food Non- Energy) to 10.1% (vs. 10.8% announced previously) citing rectification of a mistake in the computation of the Core Inflation number. Recall, October 2012 CPI was announced at a multi-year low of 7.67% and while this cemented outlook of a December 2012 rate-cut, the one key area of concern was the uptick in Core Inflation from 10.4% in September 2012 to 10.8% in October 2012. PBS’s revision of numbers has likely tempered that concern. We continue to eye 50bp cut in the policy rate to 9.5%.

2HFY13 CPI could take a lead from wheat price uptick

That said we see a potential upturn in CPI inflation if recently announced 14% increase in FY13 wheat support price results in driving up domestic wheat prices. Our calculations suggest that on an annualized basis, 14% increase in wheat price (wheat, wheat flour and wheat products have a combined 4.6% weight in the CPI basket) would contribute 60bp to headline inflation. Incorporating the hike in wheat prices into our inflation estimate, we highlight that a 14% hike in wheat prices would, ceteris paribus, take up 2HFY13 inflation to average 10.54% vs. current estimate of 9.85%. This would deliver a 35bp uptick in FY13 average inflation to 9.65-9.85%. A couple of key considerations we flag here are:

1- Note that retail wheat prices have already increased by 8.4% so far this year from Rs1,084/maund in July 2012. November 2012 wheat prices, as reported in weekly SPI release, already stand at Rs294/10-kg, equivalent to Rs1,137/maund vis-à-vis recently announced support price of Rs1,200/maund. This suggests further upside to prices could be limited, as part of support price hike is already built into prices.

2- Historically, retail wheat prices in Pakistan have averaged 10% or ~Rs50/maund higher than support price, primarily led by (i) crop, i.e. demand-supply outlook and (ii) the room provided vis-à-vis international prices. Presently, international wheat prices are hovering around the US$350/ton mark (equivalent to Rs1,330/maund), where prices have risen ~27% since July 2012 given deteriorating outlook for winter wheat crop from Russia and Australia.


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