SBP monetary tightening approach fails as CPI inflation hits 14.6% in January

KARACHI: Beating all expectations, THE Consumer Price Index (CPI) based headline inflation clocked in at 14.6 percent year-on-year for January 2020, and this is despite the policy interest rates remaining at 13.25 percent for the last six months.

Ahsan Mehanti at Arif Habib Corp said the inflation number beat all expectations even the expectations of the central bank, which was expecting it to be around 13 percent. “It seems that the central bank’s monetary tightening approach to contain inflation has failed to yield desired results.”

“These are very high numbers and may reflect on the upcoming monetary policy. The interest rates can be 200basis points higher than the real inflation, which means the policy rate might increase if the inflation persists at this level,” Mehanti said adding globally oil prices were declining, which was the only silver-lining in these challenging times.

Arsalan Soomro, MD KASB Securities said, “If it weren’t for the monetary tightening the dollar would be Rs 160 and inflation would have been near 18%. This increase is because of food inflation because of supply shocks and mismanagement. This is precisely why monetary tightening was here to stay to keep the buyers away. In Pakistan inflation is generally cost push, monetary tightening reduces the demand pull inflation, if any, and keeps currency stable”.

Headline inflation was 12.6 percent in December 2019 and 5.6 percent in January 2019, Pakistan Bureau of Statistics (PBS) reported on Saturday. On sequential basis, inflation increased by 2.0 percent in January taking seven-month inflation to 11.6 percent.

“January 2020 inflation rises, more than expectations, by 14.6 percent led by food prices. Rural food prices were up 24 percent in the month,” Muhammad Sohail CEO of Topline Securities said.

The CPI inflation Urban, increased 13.4 percent on year-on-year basis in January 2020 as compared to an increase of 12.0 percent in the previous month and 6.2 percent in January 2019.

On month-on-month basis, it surged 1.7 percent in January 2020 as compared to a decrease of 0.4 percent in the previous month and increase of 0.4 percent in January 2019.

CPI inflation Rural, spiked 16.3 percent year-on-year in January 2020 as compared to an increase of 13.6 percent in the previous month and 4.6 percent in January 2019.

On month-on-month basis, it increased 2.4 percent in January 2020 as compared to a decrease of 0.3 percent in the previous month and a decrease of 0.02 percent in January 2019.

Khurram Shehzad at Alpha Beta Core Consultancy said food was driving the headline inflation, “as we have been seeing disruption at various stages of the agricultural food supply chain, from logistical issues to weather-related disruptions as well as scams, hoarding of sugar and wheat, in addition to shortages of tomatoes and onions, recently”.

“Indeed, the central bank’s monetary tightening approach has failed, because it’s totally supply-side issues, called supply-pushed inflation, not demand-pulled”.

Sensitive Price Indicator (SPI) based inflation surged 18.3 percent in January 2020 as compared to an increase of 18.1 percent a month earlier and an increase of 3.4 percent in January 2019.

On MoM basis, it increased by 0.5 percent in January 2020 as compared to a decrease of 2.0 percent a month earlier and an increase of 0.4 percent in January 2019.

Wholesale Price Index (WPI) inflation on YoY basis increased 15.4 percent in January 2020 as compared to an increase of 12.4 percent a month earlier and an increase of 12.6 percent in January 2019.

Analysts at Arif Habib Limited expect inflation to remain elevated in upcoming months on account of regular adjustment in electricity price, another round of gas price increase, increase in prices of petroleum products and continuous surge in prices of perishable and non-perishable food items.

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