JS Securities Limited – Morning Briefing

Karachi, December 05, 2018 (PPI-OT): Decline in food inflation in Nov-2018 leads to lower-than-expected CPI

CPI registered a 6.50% YoY increase during Nov-2018, lower than 6.78% YoY in Oct-2018, but higher than 6.02% YoY for the cumulative 5MFY19.

CPI lost pace with an uptick of 0.1% MoM compared to 2.3% MoM in Oct- 2018, owing to a 0.6% MoM decline in Food inflation.

Due to low base effect until 3QFY19, CPI could regain momentum in coming months, where the stance of the central bank in the next MPS in Jan-2019 could be an interesting development.

CPI clocks in 6.5% YoY / 0.1% MoM higher in November

Headline inflation (CPI) for the month of Nov-2018 stood at 6.50% YoY, lower than 6.78% YoY in Oct-2018, however, well above 6.02% YoY for 5MFY19. Core (NFNE) inflation edged up to 8.3% YoY in the month, (8.2% YoY in Oct-2018), and stood at its highest since Jun-2014, showing clear signs of growing inflationary pressures in the economy. On a sequential basis, CPI inflation lost pace, up by a mere 0.1% MoM, compared to a multi-year high of 2.3% MoM in the preceding month. The key contributor to slowing monthly inflation was a 0.6% MoM decline in food inflation (~35% of the CPI basket), led by declines in vegetable and fruit indices. Conversely, rising meat prices (chicken prices +14.78% MoM) and motor fuel prices (+4.09% MoM) led to monthly CPI staying within positive territory. On YoY basis, house rent, gas prices, motor fuel, transport services and meat indices were the most significant contributors to 6.50% YoY inflation during the month.

Further rate hikes possible

Headline inflation could persist on an upwards trajectory for the remainder of FY19, given cost-push pressures from various fronts, including the recent most round of rupee devaluation, and impact of increase in gas prices. One concerning factor that continues to evade the spotlight is the trend of govt. borrowing from SBP which in the current year (July 1 to November 23, 2018) stands at over 20x YoY higher. In fact, this heightened level of borrowings so far stands even higher than what the previous Govt. had to borrow from the Central Bank in its full 5-year tenure. Additionally, inflation during the coming months (up to 3QFY19) could remain northbound owing to a low base effect in the same months of the previous year. Surely, this last point will not go unnoticed by the central bank, which means it will be interesting to see if further monetary tightening measures are taken by the SBP in the next MPS in Jan-2019.

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