Morning Call about Inflation Economy – Arif Habib Limited

Karachi, June 29, 2012 (PPI-OT): CPI estimated to be 12% in Jun-12

Arif Habib Limited estimates CPI based inflation for Jun’12 to be 12% YoY

The price indices for the month of Jun-12 are expected to be released by the end of this week.

According to Arif Habib Limited estimates Consumer Price Index (CPI) to be 12% YoY in Jun-12, lower than May-12 figure of 12.3% YoY. This marks a rise of 0.69% MoM against +1.1 % MoM in May-12. The Sensitive Price Index (SPI) presented a mix trend in first three weeks of June, from a sudden rise of 0.72% in second week to a sharp decline of 0.24% in third week. Arif Habib Limited believes the monthly decline is principally due to lowered oil prices which came down from USD 109.54 /bbl (May-12) to USD 96.28/bbl (Jun-12) on average. But with Ramadan approaching, it is likely that prices of food items will sharply pick up in the month ahead which can put an upward pressure on CPI.

Declining oil prices to act as a soothing agent
The international oil prices started declining from first week of May-12 and plunged down to USD 96.28/bbl (three week average of Jun-12). This sudden decline in prices of oil is mainly in lieu of weak US economic data and Euro debt crisis. Keeping in view the descending trend of oil prices, prices of non food items like fuel and transport are dipping. Arif Habib Limited has already seen in past few weeks government has sliced down POL prices up to PKR 10 on petrol and PKR 6 on CNG. If this downward trend continues, non food (energy) inflation is likely to fall to a major extent hence, positively impacting the overall inflation in the economy.

Food prices to shoot up in lieu of Ramadan
Food inflation is being fuelled by a blend of pre-seasonal (Ramadan) drift in commodity prices along with supply and demand-driven factors. Empirically, food and beverages together weigh ~37% of the total CPI basket which depicts that a hike in food prices will scoop up CPI to great extent. Till date an increase has already been seen in dairy products particularly milk (~7%), meat (~3%) and different vegetables and fruits. This is infact a threat to Arif Habib Limited’s overall inflation not only in short run but also in long run.

Hope the legacy of inflation curtailment is carried forward
Despite all the economic hindrances faced during FY12, government succeeded in achieving its inflation target of 11.5%. Considering inflation for Jun-12 turns out to be in line with Arif Habib Limited’s estimates i.e. 12% then the overall inflation for FY12 will be 11.05%. This shows a 2.51% decline in FY12 as compared with 13.7% YoY in FY11. With inflation being reasonably below the discount rate, it justifies SBP’s stance of keeping policy rate unchanged. However, FY13 seems to be a challenging year for the economy in terms of controlling inflation. With ongoing political unrest, depreciating exchange rate, election around the corner and Ramadan approaching; it seems dubious for the government to achieve single digit inflation target of 9.5%.

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