March inflation to clock at 13.4% in Pakistan

LAHORE, April 06, 2011 (PPI): After 3-months of soft numbers, headline CPI inflation is all set to once again show an upward trend to settle around 13.45% in Mar-11 as against 12.91% in Feb-11. The trend reversal is reflective of government’s decision to pass on the oil price hike to final consumer and resumption of monthly 2% electricity traffic adjustment. The two cumulatively are expected to push monthly inflation up by 1.7% MoM, while taking average 9MFY11 inflation at 14.2%.

Despite the up-tick in inflation numbers, we continue to believe FY11 average CPI to range between 14-15%, which could mean no further increase in the policy rate.

Two primarily factor are expected to push MoM CPI inflation up by 1.7% in Mar-11; i) 9-13% hike in domestic oil prices and ii) resumption of monthly 2% hike in electricity traffic. The two factors are expected to negate the impact of easing price pressure in the food group and declining HRI (home rent index). After spiking up to above 20% in post floods scenario, food inflation has continued to show a declining trend in last 3-months on account of easing supply constraints. On MoM basis, food inflation has declined by an average 0.7% in last 3-months, while weekly SPI data show no signs of alarm bells on this front.

HRI (representing 25% of CPI) which is a moderating element of the CPI has continued to depict a declining trend. HRI in eased to clock at 6.5% in Feb-11. We expect HRI which is a 24-month geometric mean of construction related cost will remain downward sticky in Mar-11.

Overall, CPI Mar-11 inflation is expected to settle around 13.4%, translating into 9MFY11 average inflation at 14.2% as compared to 11.3% in the same period last year.

Despite a sharp uptick in the pricing pressure primarily emanating from energy group, we continue to expect average FY11 inflation to fall in the range of 14-15% below the initial expectation of 15-16%.

This in turn can pave the path for monetary easing in FY12, giving the positive term of trade in the external front. In this regard, rising oil prices pose a major risk to our assumption which will either fuel inflationary pressures (if passed on) or will escalate fiscal deficit (if not passed on), but posing case for continuation of monetary tightening.