'Inflation stubborn at 29.2% in December 2023'

Research house’s forecast for Dec inflation reading is 0.7-1.7% higher than govt’s forecast

Salman Siddiqui December 29, 2023


A domestic research house has projected Pakistan’s inflation reading to stubbornly remain at an elevated level of 29.2% in the outgoing month of December 2023, significantly higher than the Ministry of Finance’s forecast of 27.5-28.5% for the month. In a commentary titled ‘NCPI (national consumer price index) to remain high at 29.2% year-on-year in December 2023,’ Optimus Capital Management’s Analyst Maaz Azam stated that the inflation reading would stay high due to a higher housing index and electricity prices.

The research house’s forecast for December 2023 inflation reading is 0.7-1.7% higher at 29.2% compared to the government’s forecast in the range of 27.5-28.5% for the month. The potential higher inflation reading diminishes the small probability of a cut in the central bank’s benchmark policy rate in January 2024.

Azam mentioned that the housing index is expected to increase by 3.8% month-on-month, driven predominantly by a 15.8% surge in electricity prices. “Electricity prices jumped 6.3% month-on-month due to higher fuel cost adjustment (FCA) charges of Rs3.08/unit (versus Rs0.4/unit in November 2023).” However, he projected a notable decline in inflation over the next three to four months, starting January 2024, primarily due to the higher base effect. “Our average inflation estimates for FY24 stand at 24.6% year-on-year.”

“While new risks continue to emerge, (low) energy prices and the (stable) rupee-dollar exchange rate will remain pivotal factors influencing inflation.” He further stated that the increase in NCPI is estimated to moderate to +0.5% month-on-month, primarily due to a 3.6% drop in the transport index and a slowdown in food inflation by 0.7%. The fuel prices, on average, declined by 4.2% month-on-month in December 2023 and are therefore expected to contribute about 3.6% to the NCPI transport index. Tomatoes, potatoes, chicken, and tea contributed most to the decline, combined with an expected seasonal drop in other perishable food items. Meanwhile, onions increased by 32% during the period based on data from the weekly SPI (sensitive product indicator inflation reading), he said.

Read Inflation in 2023 squeezed life out of Pakistanis

The State Bank of Pakistan (SBP) is expected to revise its inflation forecast in January. Earlier in July 2023, it projected the reading in the range of 20-22% for FY24. In the outgoing month of December, the central bank stated that the surge in the inflation reading from the recent increase in gas prices was higher than its expectation in November 2023.

The Ministry of Finance, in its monthly Economic Outlook for December 2023, anticipated inflation to remain around 27.5-28.5% in December 2023 and further ease out to 24-25% in January 2024. “Keeping in view the better supply position and easing out the imported inflation along with the high base effect will help to contain the inflationary pressure ahead,” it said. The ministry mentioned that the inflation outlook for the remaining months of FY2024 is seen at a moderate level despite the upward revision of administered prices (gas prices). “This is on account of a stable exchange rate, contained aggregate demand, better supply position, moderation in international commodity prices (like oil price), and a favourable base effect.”

Moreover, the recent decline in petrol and diesel prices is expected to compensate for the inflationary pressure exerted through higher gas prices, as the decline in fuel prices has a significant impact on the common man through reduced transportation and production costs.

Efforts by sub-national governments to implement lower fares for public transport and freight charges in line with reduced fuel prices would further ease the inflationary pressure.

The ministry further stated that the Food and Agriculture Organisation’s food price index, which tracks the most globally traded food commodities, averaged 120.4% in November 2023, unchanged from its revised October level, as increases in the price indices for vegetable oils, dairy products, and sugar counterbalanced decreases in those of cereals and meat. “The index stood 14.4 points (10.7%) below its corresponding level one year ago.”

Published in The Express Tribune, December 29th, 2023.

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