CPI during Jul20 is estimated to register at 8.9% as against 8.6% during Jun20 and 8.4% during Jun19. On a monthly basis, inflation is estimated to lift up by 2.1%. Sharp inflationary pressures during the month largely emanated from higher food prices and the considerable increase in domestic petroleum prices.
Food inflation and transport index on the rise
Food inflation during Jul20 is estimated to go up by 2.4% MoM primarily on account of a considerable uptick within the perishable food group. Bulk of the increase is largely estimated to exude from tomatoes (+105% MoM), Onions (+15% MoM), Spices (+33% MoM) and Eggs (+10% MoM). Potential respite is likely to emerge from easing wheat prices, which fell by 8% MoM.
Moreover, the recent hike in domestic petroleum prices (+29% MoM), reflecting international trends, is expected to contribute towards the monthly inflationary trend.
Negative interest rates to persist in the near term
Real interest rates have already entered negative territory post the recent cut in the discount rate to 7%. We believe negative interest rates will likely persist in the coming months as the government tackles food inflation. Moreover, with expectations of an additional increase in domestic fuel prices, we can witness additional pressure on CPI during 1HCY20. Overall, we believe inflation will average 6.5%during FY21, in-line with SBP’s projections.
Please find attached the detailed note.