June inflation expected to rise to 12.55% YoY, report

Inflation in Pakistan for June 2024 is expected to rise by 12.55% year-on-year, compared to 11.76% in May 2024, according to a note by AKD Research on Wednesday.

On a monthly basis, inflation is likely to rise by 0.45%, driven primarily by a rebound in vegetable prices. This pushes the CY24E/FY24E inflation estimates to an average of 14.4% and 23.4% respectively, down from 30.8% and 29.2% in the same period last year.

Regarding Non-Food Non-Energy (NFNE) inflation estimates, AKD Research expects rural and urban core inflation to average 16.1% and 11.8% YoY for CY24E, compared to 24.8% and 18.3% YoY in CY23.

The Food and Housing indices are expected to rebound on a sequential basis from the previous month’s lows. This is largely due to seasonal increases in vegetable prices and a modest rise in monthly electricity adjustments. 

The positive Fuel Cost Adjustment (FCA) and Quarterly Tariff Adjustment (QTA) for June 2024 are expected to have a cumulative impact of +0.55% on a monthly basis.

The Food index is projected to rise by 0.44% month-on-month, contrasting with the -7.83% recorded in May 2024. Key contributors to this increase include significant price rises in tomatoes (+116% MoM), onions (+28.58% MoM), pulses (+12.86% MoM), and potatoes (+4.3% MoM).

With both food and fuel indexes having bottomed out in May 2024, AKD Research anticipates that near-term Consumer Price Index (CPI) readings will be highly susceptible to the inflationary hikes announced in the federal budget 2024-25. 

Additionally, rebounds in essential commodity prices, driven by a pullback in crude oil and potential weakness in the domestic currency, could keep inflationary prospects in check. 

The end of the initial high-base effect this month is expected to hinder the chances of annual inflation readings falling below 10% in the near future. AKD’s pre-budget FY25E CPI estimate of 10.5% YoY may be revised upwards if food and service prices follow the hikes in regulated fuel prices of PKR20 per liter (+PDL surcharge).

Additionally, budgetary measures, including the introduction of GST on all local supplies of commodities and raw materials (such as poultry feed), and ambitious revenue targets (FBR Taxes budgeted at PKR12.97 trillion, up 40% YoY), also pose risks to the FY25E inflation outlook.

Due to these factors, AKD Research anticipates that the central bank will proceed cautiously in the recently initiated easing cycle, expecting the monetary policy rate to settle at 18.5% by the end of CY24.