November inflation to jump on gas price adjustment, dashing hopes of slowdown

• CPI is likely to rise to 28.6-29.6% y-o-y in November.
• Inflation could jump 2.1% on a monthly basis.
• The weekly SPI on November 16 showed a 480% increase in natural gas prices.

KARACHI: Inflation is expected to pick up in November, mainly due to a huge hike in natural gas prices, according to brokerage reports published on Wednesday.

The consumer price index (CPI), which measures changes in the prices of goods and services, is likely to rise to 28.6-29.6% year-on-year in November, from 26.9% in October.

A report by brokerage Insight Securities forecast inflation to rise 2.1% month-on-month, defying earlier expectations of a gradual slowdown from September onwards. Optimus Capital Management estimates that the CPI will increase by 2.9% month-on-month, mainly due to an 11.6% increase in the housing index due to the gas price revision and a 1.6% increase in the food index.

The main driver behind the expected rise in November inflation is the recently imposed fixed adjustment in the natural gas tariff structure. The weekly Sensitive Price Index (SPI) published on November 16 showed a staggering 480% rise in natural gas prices.

However, a slight respite from the 4.0% decline in the transportation index is expected due to lower average fuel prices in November. The impact of the natural gas price increase was partially mitigated by the decline in fuel prices and the monthly decline in the FCA.

Food inflation is attributed to the sharp increase in the prices of perishable commodities such as onions, tomatoes, potatoes and eggs, as well as tea. Despite an increase in supply from imports, wheat prices continued to rise month-on-month, while sugar and cooking oil saw significant declines during the period, according to weekly SPI data from the Pakistan Bureau of Statistics.

The newly implemented axle load regime, which limits the weight of goods transported by trucks, could put some pressure on commodity price levels.

October’s higher fuel cost adjustment (FCA) called for at Rs 3.5 per kilowatt-hour (to be implemented in December) in electricity charges and a second effect of gas price hike could keep inflation under pressure. However, the base effect in the second half of the financial year is likely to help absorb the impact.

Commodity and energy prices, along with the rupee’s exchange rate against the US dollar, will remain important factors in keeping the CPI in check.

The reports predicted that average inflation for the first five months of the 2023/24 financial year (July-June) would be 28.5%, up from 25.2% in the same period last year and with an estimated end at 19.4% on an annual basis base. year in June 2024.

They predicted that the State Bank of Pakistan (SBP) is likely to keep the interest rate on hold in the upcoming monetary policy committee (MPC) meeting due to higher-than-estimated inflation in November. However, the SBP could opt to start an easing cycle in the first quarter of 2024 given the impact of the high base in the second half of the fiscal year.

Originally published on The news