Dear Clients,

Food inflation to keep headline CPI at the higher end of SBP’s target range of 7-9%

Pakistan’s headline CPI is expected to clock in at 12.04% YoY for May’21, taking 11MFY21 average inflation to 8.94% vs 10.96% during SPLY. Despite government’s efforts to halt fuel inflation, food inflation from Ramadan and Eid festival has added fuel to the fire. Wheat and fruit prices have increased while chicken prices have skyrocketed from supply shortage which emerged from Newcastle Disease, also known as “Ranikhet Disease”, causing 30-35% mortality at poultry farms all over Pakistan.

Food inflation is short-lived: Ramadan continued to affect food inflation during May’21 where we have witnessed rise in wheat, chicken and fruit index. Most of the rise in chicken prices is attributable to Newcastle Disease which has caused serious supply-side issues that add to the SBP’s list of risks to inflationary outruns.

Government fixed the wheat support price in Mar’21 to PKR 1800/40kg (up PKR 400/40kg) and Pakistan wheat production is targeted at 26.2mn tons (last season 25.2mn tons) while a reserve of 0.3mn tons is already ensured. The government is now targeting to import 3mn tons of wheat over the near term and establish a strategic reserve of 1.0mn tons wheat to be able to buffer any future supply shocks.

What does near term inflation look like? With the Budget FY22 targeting revenue collection of PKR 5.8tn and the billowing circular debt necessitating energy tariff hike ahead, it is likely that inflation may scale up mildly in the near-term while the government renegades the handling of food inflation in Pakistan.

Regards,
KASB Research