CPI for the month of Jan’19 rose 7.2%YoY as compared to an increase of 6.2%YoY registered in Dec’18. On a MoM basis, CPI incremented 1.0% in Jan’19 versus a decline of 0.4% registered in the previous month. The inflation reading arrived higher than our expectation primarily due to hike in electricity tariff (8.5%YoY).
Analysts at Pearl securities said that the housing & utilities (CPI weightage 29.4%) continues to be the largest contributor in headline inflation (11.6%YoY), mainly on the back of hike in gas (85.3%YoY) & electricity tariff (8.5%YoY), quarterly uptick in house-rent (8.2%YoY), rise in construction inputs/wages (12.6%YoY/9.3%YoY) along with increase in costs associated with water supply (12.9%YoY).
Moreover, transport group was another major contributor in Jan’18 headline inflation (15.0%YoY) as price of motor fuel & transport services incremented 18.1%YoY and 15.2%YoY, respectively. Moreover, increase in prices of clothing & footwear (7.2%YoY) and hike in cost of education (10.0%YoY) were also amongst major contributors in Jan’19 inflation reading.
Core inflation (i.e. non-food, non-energy) clocked in at 8.7%YoY during Jan’19 versus an increase of 8.4%YoY depicted in the preceding month. On a MoM basis, NFNE inflation arrived at 1.1% in Jan’19 versus an increase of 0.3% recorded in the previous month.
Food inflation arrived at 2.4%YoY during the month as compared to an increase of 0.9%YoY registered in Dec’18, primarily on the back of hike in the prices of food items such as spices (15.3%YoY), meat (13.6%YoY), tea (12.6%YoY), sugar (10.0%YoY), pulse moong (8.3%), milk powder (7.7%), beans (7.0%) and several other food group constituents.
With regards to inflation outlook, we estimate average headline inflation for FY19 to arrive within 7.5%-8.5% range (7MFY19 – 6.2%YoY) due to anticipated re-emergence of food inflation, higher utility rates & lagged impact of hefty Pakistani Rupee devaluation.
In terms of monetary policy outlook, State Bank of Pakistan hiked key policy rate by 25bps to 10.25% in the first monetary policy announcement of CY19. With several macroeconomic challenges such as higher oil import bill, depleting foreign exchange reserves and rising inflation truncating country’s real interest rate, analysts at Pearl securities believe SBP may hike rates further in CY19, albeit at a lower quantum in order to arrest inflationary pressure & address deteriorating macros (Twin deficit).