Categories: Economy

Inflation expected to trend downwards in May

Overview of Inflation Trends

The latest data suggests a notable decline in headline inflation for May 2024 compared to the previous month. We anticipate a year-on-year (YoY) headline inflation rate of around 13%, down from 17.3% YoY in April 2024. This decrease is attributed to several factors including the high base effect, a decrease in the food index, and the housing index.

On a month-on-month (MoM) basis, the Consumer Price Index (CPI) is expected to drop by approximately 2.1% in May. This would bring the CPI to around 13%, a level not seen in two years.

Factors Impacting Inflation

Food Index

The YoY decline in the National Consumer Price Index (NCPI) is largely driven by a significant drop in the food index, which is estimated at 1.9% YoY compared to 9.7% YoY in the previous month. Similarly, the monthly food index is expected to decline by 5.9% MoM, a notable decrease compared to April.

The reduction in food prices can be attributed to improvements in the supply chain, stable international commodity prices, and weaker consumer demand.

Housing Index

The housing index is forecasted to record a YoY increase of 32.4% but may decrease by 1.8% MoM. This decline is primarily due to reduced electricity charges, down by 2.5% MoM.

Transport Index

The transport index is projected to grow by 10% YoY, but on a monthly basis, it is expected to decline by 2% MoM. This decrease is attributed to a 3% drop in fuel prices and a 5% decrease in transport services during May 2024, driven by lower international oil prices.

SBP’s CPI Target and Monetary Policy

The State Bank of Pakistan (SBP) has set a medium-term CPI target range of 57% for September 2025. Various growth scenarios suggest that achieving this target is feasible, with the CPI averaging at 5.3% YoY under certain growth conditions. The downward trend in CPI is expected to continue into FY25, potentially reaching the SBP’s target in the first half of the fiscal year.

Policy Rate Considerations

The International Monetary Fund (IMF) has acknowledged the SBP’s monetary stance and emphasized the importance of a tight policy to achieve medium-term inflation objectives. The projected increase in positive real interest rates presents the Monetary Policy Committee (MPC) with the flexibility to consider reducing the policy rate.

However, given ongoing negotiations regarding a new IMF program and IMF guidance on policy rates, it is anticipated that the policy rate may remain unchanged in the upcoming MPC meeting in June.

Disclaimer

The information in this article is based on research by Sherman Research. All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.

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