The average inflation for the financial year 2010-11 remained at 13.93 per cent. According to the Federal Bureau of Statistics (FBS) the Consumer Price Index (CPI) based inflation for June 2011 registered a 13.13 per cent YoY rise compared to a rise of 13.23 per cent YoY recorded in May 2011.
This brings the FY11 average inflation to 13.93 per cent YoY against 11.71 per cent YoY witnessed in FY10, which is below than SBP revised estimates of 14.0 per cent-14.5 per cent. Rising food and energy prices along with GoP reliance on government borrowings were the major reasons for high inflation in FY11.
However, in FY12 we expect the average annual CPI inflation to fall back to 12.6 per cent YoY. Factors responsible in FY11 for inflation will continue to portend in FY12. In the back drop of this, we believe low inflation outlook may provide SBP monetary easing from the 2nd Half FY11.
Food Inflation: 17.69%
Food inflation overall witnessed an increase of 0.53 per cent MoM, notably in its subcomponent the non-perishable food items registered a 1.08 per cent MoM rise. According to a report by Arif Habib Research, the falling international food prices (1.02 per cent Month-on-Month drop in the Food and Agricultural Organisation index for May 2011) gave some respite in perishable food items (that registered a 9.51 per cent YoY rise against a YoY peak 53.87 per cent witnessed in Nov’11) from the steady double digit increases seen over the last 11 months in FY11. This brings the average annual food inflation at 17.69 per cent YoY. Going forward, analysts believe that this rise in food prices would ease off owing to normalising world food prices, better than expected crop projection in FY12 of Pakistan and 12- month moving average of SPI suggesting a change of trend. Analysts believe that food prices would fall back in medium-term while in short-term food items may see some price rigidity.
Non-food inflation: 10.4%
The non-food non-energy core inflation has consecutively registered double digit YoY growth in May and Jun 2011 of 10.2 per cent and 10.4 per cent respectively. This is mainly due to growth in M2 (+17.1 percent YoY) attributed to high government borrowings, which to date stands at Rs685 billion (25 per cent YoY rise in stock). Secondly the rising trend witnessed in House Rent. HRI, which constitutes 23 per cent weight in the total CPI basket has picked up pace in the 4QFY11 registering a 1 per cent MoM rise on average against a 0.5 per cent rise witnessed on average in 9MFY11.
Inflation FY12: 12.6% Predicted
Having the FY11 inflation performance review, the report predicts annual average CPI inflation for the FY12 to register 12.6 per cent YoY. This was based on the aforementioned factors such as falling international food prices outlook and oil prices (Arab light currently at USD108/bbl after touching a peak of 122/bbl in April 2011). However, ongoing risks to inflation remain imminent owing to high government borrowings, which may gather pace depending on bleak outlook over external funds. Therefore keeping the above in view the analysts expect the SBP to maintain the policy rate at 14 per cent in first half of FY12 while monetary easing could start from the second half of FY11 given the inflationary outlook.
