LAHORE - The consumer price index (CPI) based inflation is expected to accelerate in ongoing month of June 2018 to 5.7 percent annually from 4.2 percent of May 2018 mainly due to Pakistani rupee devaluation and jump in petroleum products rates for the ongoing month.

Experts said that June saw 15-60 percent increase in prices for a range of vegetables and fruits, while prices of meat, chicken, and milk also rose as per weekly SPI readings. The surge in prices can be attributable to Ramazan effect where food prices generally see a hike. Resultantly, experts believe food inflation is likely to increase by 2 percent monthly, which is the highest increase since March 2017. However, they contend large part of the increase should reverse to some extent in July 2018.

The POL prices increase of 4-7 percent in June 2018 could contribute a 10bps impact on CPI. Looking ahead, barring the decision of pending case in Supreme Court against recent hike, impact of the increase in POL prices on transport fares and food prices will be crucial.

Moreover, the 5.1 percent devaluation seen in June 2018 is expected to have some impact on clothing, cosmetics and miscellaneous items, while a delayed impact on construction, motor vehicles, and food prices can be seen in coming months.

Experts said that depreciation of rupee against US dollar was expected as the government had artificially capped it which has now ultimately depreciated, opening a new floodgate of inflation.

FPCCI former president Mian Idrees said depleted exchange rates will cause a new inflation storm which is already on the rise. He believed an increase in regulatory duty on import has not affected its volume rather it is increasing. He said deprecation in rupee will not increase the exports but increase debt burden and inflation.

Lahore Businessmen Front senior vice chairman Sardar Usman Ghani also expressed concern over a sharp depreciation of the rupee against the US dollar, fearing it will cause a manifold increase in foreign debt, enhance cost of production and unleash a new wave of inflation. He called on the State Bank and the caretaker government to take immediate remedial measures to end volatility and bring stability in the currency’s value. He said Pakistan was already overburdened with foreign debt and the rupee’s weakness would further increase the debt level. He pointed out that a rise in inflation due to the depreciation would curtail purchasing power of the people, leading to a further slump in business activities.

While the increase is not unanticipated due to Ramazan effect and low-base, the magnitude of the jump in June 2018 along with already sticky core inflation (around 7 percent) should serve to increase policy rate hike expectations. Experts see increasing risk of 50bps hike in policy rate in the next bi-monthly monetary policy review due in end July 2018 owing to impact of recent devaluation on CPI (estimated to be around 20-30bps in next 2-3mnths) potential risk to agri output emanating from water shortages this year. This may take average CPI inflation in FY18 to 4.0 percent versus 4.2 percent last year.

Experts said that three major pressure points in June are likely to result in approximately 1 percent monthly increase in CPI versus a softer month of May 2018 which saw 0.5 percent MoM increase (and average 0.55 percent MoM increase seen in 11MFY18 excluding months in which CPI declined).