-December 2013 CPI inflation surprised positively with headline inflation dipping to 9.2% YoY vis-à-vis the recent high of 10.9% in November 2013. On a MoM basis, inflation registered 1.3% lower in December 2013.
-While moderation in inflation was broadly anticipated, December 2013 CPI clocked in below market expectations on account of a more pronounced decline in Food Inflation (-3.3% MoM).
-1HFY14 CPI inflation stands at a respectable enough 8.9% vis-à-vis 8.3% CPI in the corresponding period last year and State Bank of Pakistan’s (SBP’s) FY14 full-year inflation outlook of 10.5-11.0% (JS outlook: 10.1%).
-We see a best-case scenario of single digit inflation carrying through to January 2014 as well. That said, we believe 2HFY14E CPI risks remain (low base effect + impact of fiscal adjustments).
-Given SBP’s recent hawkishness and concerns on rising inflationary expectations our interest rate view is unchanged. We eye a 50bp rate hike to 10.5% in January 2014 MPS and a further 50bp rate hike by June 2014.
December 2013 CPI a pleasant surprise at 9.2%
December 2013 CPI inflation surprised positively with headline inflation dipping to 9.2% YoY vis-à-vis the recent high of 10.9% in November 2013. While moderation in inflation was broadly anticipated for the month on the back of a decline in perishable food prices, December 2013 CPI has clocked in decently below consensus expectations (9.5-10.5%). The same is on account of a sharper-thaneyed decline in food prices (due to the end of the stalemate between transporters and the government) where Food Inflation for the month clocked in at 9.3% YoY as compared to 13.0% a month back. Meanwhile on a MoM basis, December 2013 Food Inflation declined by 3.3% leading the 1.3% MoM decline in overall CPI inflation. While moderation in food and headline inflation is sharp this month, note that the decline in core inflation is more modest with Non-Food-Non-Energy (NFNE) inflation coming in at 8.2% YoY in December 2013 (vs. 8.5% in November 2013) and Trimmed Mean CPI clocked in at 8.7% YoY (vs. 9.2% a month prior).
1HFY14 inflation respectable at 8.9%
Resultant 1HFY14 CPI inflation stands at a respectable enough 8.9%, not too far off from the 8.3% CPI recorded in the corresponding period last year and averaging lower than our and State Bank of Pakistan’s (SBP’s) FY14 full-year inflation outlook of 10.5-11.0% (JS outlook: 10.1%). Likewise, given the sharper than earlier eyed decline in food prices this month coupled with recent Pak Rupee appreciation (+2.8% MoM in December 2013), we highlight that the best-case scenario for January 2014 CPI inflation is also in single-digits. We flag potential gas price hike, if implemented, as a risk to January 2014 inflation outlook.
2HFY14 CPI outlook higher; Rate hike view intact
That said, we continue to anticipate an uptrend in 2HFY14E CPI, on the back of (1) the low base effect of 2HFY13 (where CPI averaged at 6.5%); (2) continued impact of power tariff hikes; (3) impending gas tariff hike (applicable from January 2014) and (4) potential inflationary impact of required fiscal adjustments (the government is due to decide a timeframe for phasing out of tax exemptions and concessions this month). Given SBP’s recent hawkishness, concerns on rising inflationary expectations attached to unwinding of fiscal subsidies and relatively modest moderation in core inflation, our interest rate view is unchanged. We continue to eye a 50bp increase in the Discount Rate to 10.5% in January 2014 MPS (Monetary Policy Statement) and a further 50bp rate hike by June 2014.