Morning Call about Inflation Review – Arif Habib Limited

Karachi, November 05, 2012 (PPI-OT): CPI up by 7.66% in Oct-12; a 50bps cut likely

CPI clocks in at a four year low 7.66% YoY in Oct-12
The Consumer Price Index (CPI) inflation registered an increase of 8.8% YoY during 4MFY13 as compared to the same period of last year, according to the data released by Pakistan Bureau of Statistics (PBS).

According to Arif Habib Limited, in Oct-12 alone, CPI inflation witnessed a rise of 0.4% in Oct-12 over the preceding month and 7.7% against inflation of same period last year.

Core NFNE increased by 10.8% YoY
If Arif Habib Limited looks at the categorical break up of CPI data, it is learnt that core inflation measured by Non-Food Non-Energy CPI (core NFNE) increased by 10.8% YoY in Oct-12 compared to 10.4% YoY in Sept-12. Categorically and in descending order the increase in prices was: 18.3% in recreation and culture charges, 17.86% in beverages and tobacco, 15.6% in transportation charges, 14.4% in clothing and footwear, 14.7% in furnishings and household equipment maintenance and also in healthcare charges, and lastly education charges increased by 10.07 % in Oct-12 against the same period last year. Also, the Wholesale Price Index witnessed an increase of 7.5% YoY in Oct-12 compared with 7.8% a month.

A few concerns regarding the inflation in months ahead
While inflation has shown moderate growth in the recent months, but the upside risks attached to the overall inflation still persist. Though some respite is coming from cooling off crude oil prices (down 3% from Oct-12 average) however rising government borrowing (up 13% YoY) and further erosion in PKR are likely to create challenges for lowering inflation as falling rupee is likely to result in costlier Pakistani imports in rupee terms.

Another 50 basis points cut is likely
This recent decline in inflation solidifies the case of at least 50 basis points cut in upcoming Monetary Policy Statement. Indications of this expected cut are already evident from the stock market where the Benchmark Index (KSE 100) closed well above the 16,000 level the day, when inflation figures hit the market. Recent T-Bill auction also witnessed a decline of 40bps in the cut off yields which reflects the market sentiments of further cut in the next monetary policy.

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