AKD Quotidian about — CPI in single digit

Karachi: CPI inflation in the last month of CY11 clocked in at 9.75%YoY, bringing 1HFY12 average CPI to 10.89%. The last time CPI was in single digits was back in Dec’09 (rebased).

According to AKD Securities, MoM CPI depicts a deflationary trend, in line with the SPI data, where CPI reduced by 0.7% MoM in Dec’11. This easing in inflationary pressures has come on the back of contained Food inflation (34.83% weight in CPI basket; up 9.53%YoY) and a low 6.45%YoY increase in Housing & Utilities (29.4% weight in basket) Core/NFNE inflation has continued its sequential downtrend to clock in at 10.1%YoY in Dec’11 vs. 10.4% in Nov’11. Assuming a sequential CPI increase of 1%MoM, full-year FY12 CPI will average 10.8%. Considering this is lower than the DR, 1HFY12 provisional tax collection is on target and the exchange rate is consolidating at the PKR90/US$ mark, interest rates could come off by 50bps in the next monetary policy. That said, inflationary pressures could rise across the medium-term on systemic transmission of the recent gas price hike.

Inflation Review: CPI shed 0.7%MoM in Dec’11 to clock in at 9.75%YoY, in line with weekly SPI data. The deflationary trend is on the back of sequentially lower Food inflation (particularly vegetables chicken and sugar) and stable prices of Housing & Utilities (housing now based on actual rent survey). Single-digit CPI has been recorded after a gap of 24 months, bringing 1HFY12 average CPI to 10.89%.

Inflation Outlook FY12: Assuming a 1%MoM increase in CPI, full-year FY12 CPI will average 10.8%, much lower than the Discount Rate (12%). This could reopen the possibility of monetary easing (by 50bps) in Jan’12 particularly as this is the last CPI data set before the monetary policy announcement. That said, risks remain; while 1HFY12 tax collection of PKR812bn (up 27%YoY) indicates the full-year target of PKR1,952bn will likely be met, systemic transmission of recent gas price increase coupled with renewed deficit monetization and principal repayments on foreign loans may close the door on medium-term monetary easing.