CPI up, commodities down, target reduced


CPI for May came in above consensus at 12.3%YoY, up from 11.3% in April 2012. Month-over-month statistics for May appear slightly better at 1.1%, down from 1.8% recorded in April. The reason for higher CPI was due to the upward revision in electricity prices. Electricity prices recorded an increase of 16.39% during May. The weight of Housing, Water, Electricity and Gas & Fuel in CPI basket came in at 29.41%. Resultantly, the contribution of electricity in CPI was recorded at 3.2ppts out of 12.3ppts in May. Had the electricity prices stayed stagnant, the CPI would certainly have come below 11% mark. The impact of higher electricity prices is also visible from the core (underlying) inflation statistics for May. Pakistan Bureau of Statistics (PBS) reported Core Trimmed CPI at 11.7% in May 2012, up from 11.0% in April 2012. Nonfood non-energy (NFNE) also increased by 11.1% in May, compared to 10.8% in April.

Commodities prices down globally

The ongoing Europe debt crisis and slowdown in USA, China & India have off late massively hit the commodity prices on a global scale. CRB index, a benchmark for commodity prices has melted 11% since May 1, 2012, and 20.3% since July 1, 2011. The global growth concerns have also produced a steep decline in international oil prices and Arab Light which declined by 23% from its recent peak of US$126/bbl on Mar 16, 2012). This we believe may ease the inflationary concerns at least from the imported inflation.

Government targets inflation at 9.5% in FY13 The recent decline in global commodity prices will definitely ease the inflationary expectation going forward. In addition, the government (in the Budget FY13) has substantially rationalized existing tax rates in the shape of FED, Sales tax & customs duty to ease the burden on commodity prices in general. However, structural issues of the CPI in Pakistan are yet to be addressed as government is heavily relying on domestic borrowing. Already the government had borrowed over Rs1.05trn from domestic sources for deficit financing and for the next year government has estimated to borrow Rs971bn. This coupled with rupee depreciation of 7.8% will definitely put an upward pressure on inflation. Keeping domestic & international developments in mind, we believe inflation target of 9.5% is not an unachievable task.


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