Pakistan Bureau of Statistics released the CPI Inflation data for May20. CPI Inflation clocks in at 8.2% Y/Y during May20 compared with a reading of 8.5% recorded during Apr20 and 8.4% during May19. On a cumulative basis, average inflation is 11.0% during 11MFY20 compared with 6.7% recorded during 11MFY19. 

Ramzan-driven food inflation offsets the decline in fuel prices

Food inflation during May20 escalated by 1.63% MoM due to a considerable hike in prices of key items including Chicken (+41% MoM), Potatoes (+31% MoM) and Onions (+23% MoM). Due to its higher weight, food inflation was able to offset the ~15% reduction in domestic fuel prices, which reduced the transport index by ~6.5% MoM. Ultimately, monthly inflation grew by 0.32% MoM during May20.

Real interest rates temporarily hovering in the negative region

After the recent cut in interest rate by 100bps to 8.0%, real interest rates are now expected to hover in the negative region. For May20, real interest rate is negative 0.2%. We, however, believe this phenomenon will be temporary as we anticipate inflation to slow down further once food prices normalize in the coming months. Nevertheless, we estimate inflation to average 10.7% during FY20, slight below SBP’s forecast of 11%-12%.