CPI inflation for the month of August 2012 came in marginally below market expectations at 9.05%. Benign inflation number, while received well at the KSE, should not carry the same surprise factor that we observed at July 2012 single digit inflation reading, where we believe sub-10% inflation was largely anticipated by the KSE this time round. That said, with CPI figures looking to hover around the 9-10% mark in the first half of FY13, soft CPI figure released for August is likely to buoy expectations of a further potential cut in the policy rate in the next Monetary Policy Statement (MPS) expected in October 2012. Circles at the KSE are already debating a 50-100bp cut.
August 2012 CPI: Soft reading at 9.05%
CPI inflation for the month of August 2012 came in marginally below expectations at 9.05% (consensus average forecast was 9.20%). While the inflation number is benign, we believe that as sub-10% inflation was largely anticipated by the KSE, it should not carry the same surprise factor as was observed with July 2012 single digit inflation reading of 9.6%.
Details of the inflation reading
Going into details of the August reading, overall CPI clocked in at 9.05%. The same is primarily on account of the ongoing impact of July 2012 gas price cut where August CPI basket gas prices were reported 42% lower YoY. On a MoM basis, CPI increased by 0.9% in August 2012 as compared to a decrease by 0.2% in the previous month where MoM increase was largely a function of (1) higher perishable food prices, given Ramadan impact and (2) impact of 12% average hike in petroleum product prices. Meanwhile Core inflation i.e. nonfood non-energy CPI (Core NFNE) moderated slightly, increasing by 10.8% in August 2012 as compared to 11.3% in July 2012. In 2MFY13, General CPI slowed down to average 9.3% as against 12.0% in the same period last year. Note though that Core inflation (Non Food Non Energy – NFNE) is still relatively sticky, averaging 11.05% in 2MFY13 as compared to 9.85% in 2MFY12.
Room for further easing in October MPS?
While we expect impact of September 01, 2012 domestic petroleum product price hike (up Rs5.5-8.2/litre) to reflect in next month’s CPI numbers, we anticipate the same to contribute a not alarming 0.61% directly to overall YoY September CPI. July’s massive gas price cut will meanwhile continue to lend a favourable bias to overall CPI figure, which is looking to hover around the 9-10% mark in the first half of FY13. Resultantly, soft CPI figure released for August is likely to buoy expectations of a further potential cut in the policy rate in the next Monetary Policy Statement (MPS) expected in October 2012. Circles at the KSE are already debating likelihood of a 50-100bp cut which will result in zero real interest rate.
Risks to single-digit inflation going forward
We flag the risks to maintaining single-digit CPI in the longer term, which include (1) risk of continued hike in international oil and resultantly domestic petroleum product prices as expectations of yet another round of Quantitative Easing take shape; (2) risk of higher food prices going forward, where FY13 has to date borne witness to heavy rains/flash floods in some parts of the country and drought in others which poses a risk to agriculture output as well as smooth food supply.