CPI to Slow Further to 7.7% in September: Report

Staff Report:
Sherman Research expects headline inflation for September 2024 to be reported at 7.7% year-on-year (YoY), compared to 9.6% YoY recorded in the previous month. This marks Pakistan’s second consecutive month of single-digit inflation. The decline in the Consumer Price Index (CPI) can be attributed to slower growth in the food index and a decrease in the transport index. On a month-on-month (MoM) basis, CPI is expected to decline by 0.2% in September 2024.

Inflation to drop further, ~7.3% in Sep’24e

The heavyweight food sector is projected to grow by 1.1% YoY, down from 2.5% YoY in the previous month. On a monthly basis, the food index is expected to grow modestly by 0.3%. The slowdown in food index growth is mainly driven by a declining trend in wheat prices since February 2024. Additionally, lower growth in the prices of eggs, pulses, onions, and fresh vegetables is expected to contribute to the slower growth rate on a MoM basis.

The housing index is anticipated to grow by 21.5% YoY, compared to 22.2% YoY in the previous month. However, on a MoM basis, the housing index is expected to remain flat in September 2024.

Interestingly, the transport index is projected to decline by 7.4% YoY in September 2024, in contrast to the 3.2% YoY growth recorded in the previous month. Similarly, on a MoM basis, the transport index is expected to decline by 2%, driven by a 4% MoM drop in fuel prices. This marks the fourth consecutive decrease in fuel prices, with local fuel prices now at a 20-month low. We expect the reduction in local oil product prices to impact food prices in the coming weeks.

Policy Rate Cut Cycle to Continue for the Rest of CY24

The policy rate currently stands at 17.5% following a 200 basis point (bps) cut in the last Monetary Policy Committee (MPC) meeting. With the real interest rate (RIR) hovering around 10%, we anticipate another 250 bps cut across the remaining two MPC meetings scheduled for CY24, assuming international oil prices remain stable.

We believe the MPC aims to maintain the RIR at around 8%, which will help achieve its medium-term inflation target of 7%–5% by September 2025, while ensuring a sufficiently tight monetary stance in line with IMF guidance, Sherman Research said in a report.