AKD Quotidian about — Mar’12 CPI Review and Inflation outlook

Karachi, Mar 28, 2012 (PPI): According to the latest data released by PBS, CPI in Mar’12 has clocked in at 10.79% YoY, inline with AKD Securities expectation of 10.82%YoY, and translating into a 117% MoM increase.

According to AKD Securities, as a result, 9MFV12 average CPI has registered at 10.81% YoY vs 1395% YoY during the same period last year. This is more than 100bps lower than the Discount Rate at 12%. MoM rise in inflationary pressures has come on the back of increase in Food inflation (34.83% weight in CPI basket; +9.81% YoY/1.54% MoM), Clothing and footwear (7.57% weight; 16.6% YoY/3.35% MoM) and Transport (72% weight; 19.1% YoY/ 1.94% MoM). Sequentially, Housing and Utilities (29.4% weight in basket) remained muted, up 7.55% YoY/0.04% MoM. At the same time, Core/NFNE inflation maintained its upward trajectory and was recorded at 10.8%YoY in Mar12 vs. 1O.6%YoY in Feb’12. Going forward, in consideration of the recent petroleum price hike, some escalation in price pressures may be witnessed in the coming months of FY12. Assuming a sequential CPI increase of 1.4%MoM going forward, full- year FY12F CPI will average 11.06%YoY. While FY12 inflationary target will be within the 11%-12% expected by SBP, medium-term ambition to bring CPI in single digits seems challenging on the back of 1) potential sticky int’l prices (Arab Light: US$ 125.26/bbl) which consequently has spill over effect on the entire CPI basket, 2) expected potential populist decision-making leading to fiscal profligacy, 3) PkR depreciations of 5.4%FYTD leading to imported inflation and 4) waning rebasing effect.

Inflation Review: CPI rose by 1.17% MoM in Mar’12, translating into an annual increase of 10.79%. As a result, 9MFY12 average CPI registered at 10.81%, more than 1% lower than the Discount Rate (12%). The sequential increase in price pressures is primarily on the back of the increase in Food inflation, up 9.81% YoY/1.54% MoM (MoM increases – Pulse Gram; up 33.47%, Besan; up 23.79%, Fresh Fruits; up 17.12% and Sugar; up 11.80%). At the same time Core/NFNE inflation in Mar’12 continued its sequential upward trend and was recorded at 10.8%YoY. Sequential Increase in Non food terms includes Motor Vehicle Tax (up 20.34%), Footwear (up 14.25%), Kerosene Oil (up 3.45%) and Marriage Hall Charges (up 2.88%).

Inflation Outlook: Should MoM CPI average 1.4% for the remainder of FY12, full-year FY12 CPI will average 11.06%, inline with the SBPs projections. While sub-DR inflation may lead to status quo in the upcoming MPS, potentially extending the KSEs recent bull run, risks to medium-term inflation emanate from 1) any increase in int’l oil prices (Arab Light US$1 25.26/bbl) which consequently has spillover effect on the entire CPI basket, 2) potential populist decision making and GoP indiscipline in borrowing from SBP, 3) intensifying pressure on the PkR with IMF repayments and reserve erosion going forward and 4) waning rebasing effect.

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