Lahore - The inflation for November 2017 is going to clock in at 4.21 percent annually against 3.83 percent recorded in October 2017, as the food inflation is changing its landscape.

According to experts, taking cue from the recent SPI numbers, monthly inflation is expected to be recorded at 0.57 percent driven by food inflation, transport and the low base effect of the previous year. They forecast food inflation to advance by 0.98 percent on monthly basis driven by 28.8 percent MoM mainly due to increase in egg prices, cut in day hours and continued increase in onion and tomato rates (+6.1 percent MoM). The continued hike in veggie rates is defying historical trends of correction these days owing to reduced imports from India. Further, revision in MS and HSD prices by 3.4 percent MoM and 6.5 percent MoM, respectively is expected to lead transport index to increase by 1.5 percent MoM. The 5MFY18 inflation is consequently expected to be recorded at 3.63 percent YoY as against 3.95 percent in the corresponding period last year. Food inflation will subside lower than seen in previous year: Food inflation that takes a breather in winter is expected to witness a lower correction on account of prices remaining stable in summer as compared to the corresponding period last year. Resultantly, inflation for Dec 2017-Feb 2018 is forecasted to remain between 4.0-4.7 percent and expected to exceed 5 percent mark in the later part of the year. FY18 inflation is expected to be recorded at 4.4 percent with our average oil assumption at USD54/bbl. Arablight has rallied 5.0 percent (1M) on the likelihood of extension in production cut agreement till CY18. However, differences have emerged between Saudi Arabia and Russia where Russia seems to be reluctant to lose share to shale producers. Experts opine that an overheated oil rally would be unable to sustain USD60/bbl despite strong demand outlook and falling rig count levels in US.

To highlight, a USD5/bbl change in oil price assumption changes experts FY18 CPI forecast to 0.1ppt. Additionally, excessive depreciation (3-5 percent assumed) should act as a catalyst for inflation. FY18 inflation projection implies a comfortable real interest rate spread of 135bps which shall refrain MPC from interest rate hike at least till Jun 2018. Where the same is positive for Pakistan’s economic growth (1QFY18 LSM: 8.4 percent YoY); however, the downside is the aggravating balance of payment position.

The raising of USD2.5b through Euro Bond/Sukuk issuance and higher probability of CSF inflows shall provide support to depleting reserves.