Inflation numbers, after a lapse of 16‐months, are once again expected to touch double digits in Nov 2013. Incorporating the impact of high food inflation which is likely to touch 26‐months high level, the Nov 2013 CPI (Consumer Price Index) is likely to clock in the range of 10.3‐10.5% which is the highest since July 2012. On a Month over Month basis, we expect inflation to stand around 0.6‐0.9% versus 1.97% recorded in the preceding month.
With inflation numbers expected to remain at elevated levels on the back of i) low base effect and ii) likely rationalization of gas tariff, it makes a case for the process of monetary tightening to continue in the next MPS (scheduled in Jan’14). The next rise is likely to be the last in the current cycle of monetary tightening, as we eye inflationary pressures to slightly taper‐off beyond Dec’13. However, much is dependent on the stability of PkR‐US$ parity, as abrupt weakness in the PkR giving rise to imported inflation.
Food prices: the major culprit
After remaining in single digits since Jul’12, Nov’13 CPI is likely to once again climb back into the double digit territory. With low base effect of the last year coming into play, recent rise in the food price (particularly perishable) stands out as the major culprit. In addition, the second round impact of hike in electricity and petroleum prices along with PkR weakness cannot be ruled out in the smaller heads of the CPI. On a Month over Month basis we expect an increase in the range of 0.6‐0.9% versus 1.97% last month, rendering into Nov’13 CPI to clock around 10.3‐10.5% Year over Year against 9.1% last month. During 5 Months of Fiscal Year 2014, average inflation is likely to stand around 8.8% versus 8.4% in the same period last year.
PkR‐US$ stability: a major concern for inflation outlook
Although, we expect inflationary numbers to remain at elevated levels for the next 2‐months on the back of i) low base effect and ii) possible rationalization of gas tariff, the numbers are likely to taper‐off beyond that. In our base case, we expect 2nd Hlaf of Fiscal Year 2013-14 inflation to average around 9.5‐10%, making a case for another hike of 0.5% in the Discount Rate in the next MPS, but last in the current cycle of monetary tightening, in our view. However, much is dependent on external flows and its impact on PkR‐US$ parity. Pressure on forex reserves attaches a risk of imported inflation to our numbers. In this regard, a close eye should be kept on WPI (Whole sale price index), which touched 23‐months high of 9.8% last month.
