Morning Call about – Inflation at 7.36% in FY13; FY14 average to hover around 10% – Arif Habib Limited

Karachi, July 02, 2013 (PPI-OT): Inflation at 7.4% in FY13 against targeted 9.5% Surprisingly, CPI inflation for the month of Jun’13 rose by only 5.85% YoY, against 5.13% recorded in May’13 and 11.3% in Jun’12.

According to Arif Habib Limited on a monthly basis, the pace of increase was only 0.7% vis-à-vis 0.5% recorded a month earlier, despite imposition of the 1% incremental GST (effective 13th Jun’13) that was decided upon by the govt in the budget FY14. With this, full-year FY13 inflation in Pakistan clocks in at 7.36% (11.01% in FY12) deeply contained against full-year FY13 target of 9.5%.

Decline in perishable food and benign core inflation make a mark On one hand, food inflation was up 1.1% MoM (7.9% YoY) in Jun’13 amid major increase in , the major decline was observed within the food category of perishable items (~5% weight in CPI), such as fresh fruits (-10.1%) and fresh vegetables (-4.2%), Eggs (-2.6%) etc., which cumulatively went down by a hefty 4.8% MoM in Jun’13 and limited Jun’13 CPI increase by a good 29bps MoM.

Furthermore, benign Non-Food-Noon-Energy core inflation at 7.8% (up only 0.4% MoM) also contributed to slower pace of the overall CPI inflation in Jun’13. Encouragingly, core inflation –which is a more refined version of the inflationary trends –has been slowing pace since May’12 (11.1%) to Jun’13 (7.8%).

FY14 inflation the real test
After the single-digit inflation recorded in the year FY13, the newly formed govt after taking charge earmarked in its first budget an inflation target of 8% for FY14.

So, keeping pressing challenges such as weakening externals with currency depreciation risks amid reduced import cover (less than 60 days), bloating fiscal deficit with risks associated with delayed energy reforms (though part circular debt amount has been disbursed), planned measures by the govt such as increase in GST and other taxes through the supply lines alongside gradual rise in power and gas tariffs may re-introduce inflationary pressures impacts of which will ultimately be passed on to end consumers and reflect in higher CPI than targeted.

Annual inflation to exceed target while price management key
For analysis purposes, if Arif Habib Limited evens assume 1% MoM increase in the CPI inflation, the full-year number would end up at 10% vis-à-vis 8% targeted by the govt for FY14. Stability of oil prices is also a key in keeping inflationary pressures at bay while better supply-side management should yield stability in food prices (as the govt plans to monitor prices in food and other markets to ensure price stability).

As far as the next monetary policy is concerned, Arif Habib Limited believes emerging new deal with the IMF should play a key role in stabilizing forex reserves, and positivity impact PKR and its impacts on inflation and the monetary easing. For now, Arif Habib Limited keep finger crossed on any further monetary easing keeping upcoming inflationary pressures in perspective.

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