CPI inflation has slowed down 10.24% during Mar20, in-line with our estimates of 10.30%, and has averaged 11.53% during 9MFY20. On a monthly basis, inflationary pressures largely subsided and inched up by a marginal 0.04%. We believe subdued inflation during Mar20 was supported in part by alleviating supply side pressures in the food segment (weight: 34.6%), as evidenced by a 23% MoM decline in Tomato prices and an 8.4% MoM decline in wheat prices.
Recall that both these commodities witnessed a sudden spike in their prices during the year due to disruptions in their supplies. Consequently, the food segmen remained relatively stable during the month as it grew by a marginal 0.07%. Moreover, falling domestic oil prices provided additional cushion against inflationary pressures as the transport index (weight: 5.91%) fell by 4.4% MoM.
Inflation Outlook – Convid-19 outbreak to take its toll
In the near term, we believe potential for food supply shocks exists stemming from logistical issues coupled with the increased likelihood of panic buying and hoarding by the masses amidst the lockdown. Moreover, we expect food inflation to pick pace in the near future with Ramzan on the horizon, likely spiking the demand and prices of several food items.
Potential breather for inflationary trends, however, can emanate from the recent PKR 15/liter reduction in domestic fuel prices. Overall, we expect inflation to average 11.0% during FY20, within the lower spectrum of SBP’s estimates of 11%-12%.
