Economy: October CPI to fall further

The much awaited CPI (Consumer Price Index) inflation number for the month of October is expected to be released on 1st November, which is likely to fall in the range of 10 percent-10.3percent as against 10.5 percent for September. Thus, this would be the third consecutive monthly decline which will render into four months of Fiscal Year 2011-12 average inflation to 11.2percent as compared to 13.9 percent in the same period last year. The downward trend in the inflationary pressure is expected to create further room for the central bank to continue the process of monetary easing in the next monetary policy statement (MPS) due towards the end of November.

The increase in the regulated prices of electricity and petrol during the month of October on account of rise in the international oil prices, and its indirect implications on the revised CPI basket could keep the October Month on Month inflation downward sticky. While on the other hand, relative stability in food prices particularly that in perishable items as Ramadan and Sindh floods effect fade away would some what soften the impact of inflationary pressure generated by the aforementioned two factors. Overall we estimate October Month on Month, inflation to clock between 0.6 percent to 0.8 percent compared to 1.0 percent Month on Month in September.

With high base effect of last year, we expect the Month on Month inflation number to translate into Year on Year inflation of 10 to 10.3 percent, which will be lowest since February 2010, under the revised CPI basket. The basket was revised in September on the basis of House Expenditure Survey conducted in 2007-08 and rebased to July 2008. Furthermore, we expect in four months of Fiscal Year 2011-12 average inflation to be around 11.2 percent as against 13.9 percent in the same period last year.

With high base affect phenomena expected to keep inflationary numbers subdued (at least till February 2012), we estimate average Fiscal Year 2011-12 inflation to stand between 11.5 percent to12 percent which is slightly lower than government as well as central bank’s expectation. Therefore, with present inflationary trend falling in the acceptable range and real interest rate still in the positive zone, we expect another round of monetary easing of 50 bps in the November MPS. Saying so, major risk to our assessment comes from fragility of country’s external account and its impact on PKR/USD parity, which stems from i) firm oil prices, ii) higher kerb premium adversely impacting workers’ remittances and export receipts and iii) expected pressure on financial flows in the absences of IMF’s LOC (Letter of comfort). (Top line)