CPI inflation in Sep clocked in at 23.2%   

CPI inflation for Sep 2022 clocked in at 23.2% YoY as compared to 27.3% in Aug 2022, which remained better than market expectations. On MoM basis, CPI inflation is down by 1.2% in Sep 2022 vs. an increase of 2.4% in Aug 2022. 

This decline is due to 65% MoM reduction in electricity charges during the month which led to 17.7% MoM decline in Housing, Water, Electricity & other index.

To recall, Shahbaz Sharif had recently announced deferment of fuel charges adjustment for customers consuming electricity of less than 300 units. Following this decision, electricity charges as per SPI for Quintile 1 fell by 64-65% as per week ended Sep 22, 2022. This got incorporated in Sep CPI numbers which led to lower than expected CPI reading for the month. Electricity charges has a weight of ~4% in CPI Index.

Contrary to perception, House Rent Index did not witness any decline. House Rent Index is generally revised quarterly and is expected to undergo a change in October 2022. Since, Electricity charges are part of Housing, Water, Electricity index, the overall index went down during the month.

Food & Non-alcoholic Beverages with weight of 35% in CPI index increased by 32% YoY as against an increase of 30% in August. On MoM basis, food inflation was up 6% in Sep 2022. 

Sharp rise in perishable items, up by 16% MoM led to up tick in food inflation during the month as these items witnessed significant increase post floods. Major items that saw an increase in prices included Tomatoes, Potatoes, Pulses, Wheat, Egg, Chicken etc. 

Transport index also saw an increase of 65% YoY and 2% MoM due to higher fuel prices. During Sep 2022, Petrol prices were raised by around 3% to Rs237.5 while the Diesel prices were increased by 1% in Sep 2022 to Rs248.5.

Core inflation during Sep 2022 for both Urban and Rural segment saw an increase of 14.4% YoY and 17.6% YoY in Sep 2022 as against an increase of 13.8% and 16.5% in Aug 2022, respectively.

Government has recently announced reduction in petrol and diesel prices by around 5% which is likely to support inflation outlook going forward. Petrol/Diesel prices have a direct weight in CPI of around 3%. However, reduction in fuel prices also results in containment of transportation charges and food inflation. 

This along with high base effect is likely to further improve CPI readings in upcoming months. Even a 1% increase in CPI during the next two months will result in CPI inflation of 22% and 20% in Oct 2022 and Nov 2022, respectively. We have provided a sensitivity of MoM change in CPI and expected numbers for the next 6-months in the accompanied table.

Keeping in view the inflation outlook and the reduction in current account deficit (improving from US$1.2bn in July 2022 to US$703mn in Aug 2022), expectations of a status quo in upcoming monetary policy scheduled on Oct 10, 2022 has increased despite negative real rates.  

We believe that from 4QFY23, inflation rates could fall sharply and real interest rates could again turn positive. 

The recently appointed Finance Minister Ishaq Dar has also vowed to curb currency speculation and inflation rates. 

For FY23, we expect average inflation to remain in the range of 19-21%. This is also in line with SBP’s inflation estimate of 18-20% for FY23.