CPI Inflation Outlook for Apr-12 expected at 10.8%YoY- AHL Research
By: Saad Khan, Arif Habib Ltd.
We estimate a ~1.4%MoM rise in CPI inflation for the month of Apr-12, translating into a ~10.8YoY rise. Our calculations are based on incorporating revised oil assumption of USD 115/bbl (USD 119/bbl YTD average) up until FY12 end. However, we are keeping our FY13 oil assumption at USD 110/bbl. Moreover the ascending Sensitivity Price Index (SPI) further depicts underlying price fundamentals to trend upward in months ahead.
When prices will peak?
Although we are incorporating a higher oil assumption in our calculation but we think the effect of this would materialise after FY12 end due to a 6-month lag. We stick to our initial FY12-end target of 11.6%YoY, lower than central Bank (SBP) target of 12%. However, going forward we expect prices are likely to stay stickier in FY13. We calculate inflation to peak in 3QFY13 at ~12.8%YoY, while finally moderating in 4QFY13 to ~11.8%YoY.
Quick brief of what’s ahead in terms of prices
The inflation trajectory is likely to stay bumpy in months ahead; while in FY13 brittle global growth dynamics will keep commodity prices brisker. We put down a quick brief of what we expect will be price draggers in upcoming months, mainly looking it from supply shock dynamic.
a) International commodities: Volatility
Global commodity prices have remained friskier starting CY12 owing to demand and supply shocks. This uncertainty in our view will remain on SBP monetary policy agenda for quite a time. In fact periods of high volatility in commodity are followed by high headline inflation shocks. Policy response has been front-loaded in case of commodity price shocks.
b) Oil Prices sense a descending trend: Back to 2008
Although oil prices as measured by Arab Light gulf have retrace to USD 119/bbl from a high of USD 126/bbl (as of Apr 16, 2012), but the risk of contamination into headline prices cannot be ruled as yet. In addition any decision by government to roll back domestic petroleum prices may turn out to be brief breather, but fiscal cost of such moves cannot be overlooked at current level of fiscal deficits. Moreover judging the impact of oil prices will be trickier, as it is tough to predict how and what political situation would evolve before election period.
Although prices are likely to stay at comfortable levels in the remaining periods of FY12 and FY13, given no supply shock is sight. However policy response as mentioned has historically remained front-loaded when it comes to price shock, in particularly that emanating from food. For FY12 and FY13 we forecast average inflation at 11.6%YoY and 12.3%YoY, respectively.