Morning Call about Inflation Preview – Arif Habib Limited

Karachi: Inflation more upside ahead, well for now Arif Habib expects 10.7% YoY rise in Nov’11

Inflation might disappoint, but anticipated…
According to Arif Habib Limited, for the month of Nov’11, they expect CPI to post a 10.7% YoY rise over the previous month. Arif Habib’s calculations show that MoM headline inflation can be pushed by another +0.8%. But just as Arif Habib has stressed earlier that Nov’11, would be the time to say good bye to base-effect which have played a significant role in keeping monetary easing cycle. As for this month, Arif Habib thinks high food prices as depicted by +~6% YoY (estimated) rise in SPI and significant pass-trough of non-food prices might pose a noticeable risk to the headline print. If Arif Habib is correct in its calculations then 12-monthly moving average rate will likely to rise to ~12.4% YoY. While Arif Habib’s projections for FY12 remain slightly above SBP targeted 12.3% YoY.

In addition to this the latest news headlined, government intention to rise in Wheat support price to PKR 1,050 from earlier PKR 950 per bag (maund/~40kg). Further possibility of a likely price increase in varied petroleum products may be on the cards as the Arab Light Gulf oil touch a 2QFY12YTD high of USD 115/bbl. Alongwith that talks of Gas tariff hikes by +14% (PKR 43.93/mmbtu) at SNGPL while +11% (PKR 34/mmbtu) at SSGPL applicable from Jan’1, 2012 is also been planned. These price hikes will eventually be passed on to end consumer, holding an upside risk to Arif Habib’s initial CPI target of 12.3% YoY for FY12 (Arif Habib has incorporated an 8% energy tariff price rise in its calculations).

Waiting for the ‘paisa’ to drop…
While Arif Habib thoughts given the rate easing cycle (a 2% cut in reverse repo during 1QFY12) will be enough to justify a significant drop in PKR against USD (-1.0% since the first rate cut, FY12). And something to Arif Habib’s surprise, the SBP seems pretty much relaxed about it so far (take the aggressive monetary easing stance, spurring medium term growth and resounding inflation falling back). Arif Habib thinks PKR depreciation is finally there to feel the pinch, given the recent regional currency devaluation and the pace of rising trade deficit (~40% YoY, 1QFY12). Arif Habib thinks the sentiment is already prevalent in the market over a volatile sharp downward move in PKR. And while the CPI headline inflation has been favourable in much of the 1QFY12, Arif Habib thinks the price pass through of a weaker exchange rate may finally take full sweep in coming months ahead. This coupled with draw down on liquid reserve (debt repayments) will keep PKR resilient above 90. Arif Habib has valued PKR at 91.3 versus USD by fiscal year-end.

Oil price pull is not fading as yet…
The core inflation measured as non-food, non-energy continued its rigidness which as of last month stood at 10.5% YoY (NFNE inflation up by ~9.6% YoY, 1QFY12 against ~8.8% YoY during 1QFY11). Arif Habib has earlier stressed the importance of this unsurprisingly, unwelcomed situation. Arif Habib’s main findings are based around the international price rigidness, with oil in particularly trading around USD 108.44/bbl, ~41% YoY (Gulf Arab light FY12TD, retracing slightly from 4QFY11 average of USD 112/bbl). The possibility of second round effects of high level of oil prices feeding into the core price can not be rued out. With latest announcement of a possible pass-through of high oil prices onto end-consumer and earlier indication of likely upward adjustments in the administered prices of energy, may well assure Arif Habib’s concerns. Furthermore Arif Habib suspects the rising MoM headline inflation will be a source of concern going forward. As this might influence, in Arif Habib’s view, the price maker’s inflationary expectations and in general distort the pricing behaviour which may feed into core price sooner or later. For SBP this may jeopardise the attainment of inflation targets of 12% in FY12.

Increase in wheat support price will do less but intention seems good…
On the news headlined stating government intention to increase wheat support price, Arif Habib is unsure whether this has officially been implemented or not. As for the price watchers considering this a significant risk going forward Arif Habib’s calculation shows the impact to remain pretty much muted. In terms of how much weight does the wheat occupy in the price basket, Arif Habib thinks a mere 0.78ppt is more sounding in the medium to long-term. As for the inflationary expectation surrounding, Arif Habib has to wait for incoming food price inflation. Nevertheless, Arif Habib thinks it was high time for the government to allow wheat price differential (international and domestic) to reduce, inorder to incentivise local farm production, curtail hoarding margins, cover the endured high input cost (due to inflating raw material costs) and curb crossborder smuggling. Although Arif Habib thinks the 10% price rise will do little to curtail externalities associated with low support prices.

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