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Morning Call about Inflation risk not fully subsided as yet; for Apr-12 Arif Habib Limited expects a 10.8%YoY rise – Arif Habib Limited

Karachi: CPI inflation for Apr-12 expected at 10.8%YoY

Arif Habib Limited estimates a ~1.4%MoM rise in CPI inflation for the month of Apr-12, translating into a ~10.8YoY rise.

According to Arif Habib Limited’s calculations are based on incorporating revised oil assumption of USD 115/bbl (USD 119/bbl YTD average) up until FY12 end. However, Arif Habib Limited is keeping Arif Habib Limited’s FY13 oil assumption at USD 110/bbl. Moreover the ascending Sensitivity Price Index (SPI) further depicts underlying price fundamentals to trend upward in months ahead.

When prices will peak?
Although Arif Habib Limited is incorporating a higher oil assumption in Arif Habib Limited’s calculation but Arif Habib Limited thinks the effect of this would materialise after FY12 end due to a 6-month lag. Arif Habib Limited sticks to Arif Habib Limited’s initial FY12-end target of 11.6%YoY, lower than central Bank (SBP) target of 12%. However, going forward Arif Habib Limited expects prices are likely to stay stickier in FY13. Arif Habib Limited calculates inflation to peak in 3QFY13 at ~12.8%YoY, while finally moderating in 4QFY13 to ~11.8%YoY.

Quick brief of what’s ahead in terms of prices
The inflation trajectory is likely to stay bumpy in months ahead; while in FY13 brittle global growth dynamics will keep commodity prices brisker. Arif Habib Limited puts down a quick brief of what Arif Habib Limited expects will be price draggers in upcoming months, mainly looking it from supply shock dynamic.

a) International commodities: Volatility
Global commodity prices have remained friskier starting CY12 owing to demand and supply shocks. This uncertainty in Arif Habib Limited’s view will remain on SBP monetary policy agenda for quite a time. In fact periods of high volatility in commodity are followed by high headline inflation shocks. Policy response has been front-loaded in case of commodity price shocks.

b) Oil Prices sense a descending trend: Back to 2008
Although oil prices as measured by Arab Light gulf have retrace to USD 119/bbl from a high of USD 126/bbl (as of Apr 16, 2012), but the risk of contamination into headline prices cannot be ruled as yet. In addition any decision by government to roll back domestic petroleum prices may turn out to be brief breather, but fiscal cost of such moves cannot be overlooked at current level of fiscal deficits. Moreover judging the impact of oil prices will be trickier, as it is tough to predict how and what political situation would evolve before election period.

Bottom Line:
Although prices are likely to stay at comfortable levels in the remaining periods of FY12 and FY13, given no supply shock is sight. However policy response as mentioned has historically remained front-loaded when it comes to price shock, in particularly that emanating from food. For FY12 and FY13 Arif Habib Limited forecasts average inflation at 11.6%YoY and 12.3%YoY, respectively.

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