Karachi: According to AKD Securities, Headline Consumer Price Index (CPI) has clocked in at 13.13% in Jun’11 vs. 13.23% in May’11 and against our expectation of 13.50%. Slight easing in inflationary pressures has come on the back of 1) high base effect, 2) softer food inflation and 3) decline in energy and transportation inflation due to lower petroleum prices. However, Core/NFNE inflation has continued its upward trend and registered in double digits for the second consecutive month. In FY11, CPI has averaged 13.92% compared with current discount rate of 14%, where Pakistan is one of the few regional economies with interest rates > average inflation.
In the next 2-3 months, although AKD Securities saw incrementally higher food inflation (Ramadan effect in Aug’11), a higher base (Aug’10 floods) may lead to CPI trending lower on a YoY basis. In this regard, even if CPI increases by 1% every month, YoY CPI would hit single digits by Sep’11. In our view, while the SBP may retain a cautious approach in this month’s monetary policy, lower inflation may encourage a cut in the Discount Rate in Sep’11.
Jun’11 Inflation Review: June’11 CPI increased by 13.13YoY, while MoM increase was of 0.55%. As a result, CPI has averaged 13.92% in FY11. At the same time, Core/NJFNE inflation registered in double digits for the second consecutive month and was recorded at 10.4% in Jun11. Besides a high base, CPI softened due to 1) lower food inflation and 2) decline in energy and transportation inflation due to lower petroleum prices (diesel down 3% MoM).
High base to play key role: CPI has tagged in below expectations in Jun’11 and AKD Securities believes the declining trend will continue over the next 2-3 months. This is largely due to a high base where the Aug10 floods led to a sharp spike in food inflation. AKD Securities estimates that even if CPI increases by 1% every month, YoY CPI would hit single digits by Sep’11.
Investment Perspective: While concerns remain on the fiscal front (and international oil prices pose risks), downward trend in inflation may encourage the SBP to reinitiate monetary easing by Sep’11 – In our view, this may trigger upside in cyclical sectors (Banks, Cements and Autos) that have underperformed the broader Index of late.