Inflation to hover around 10-10.5% in FY22: PIDE


Pakistan Institute of Development Economics (PIDE)’ recently published report disclosed that inflation will likely remain between 10% to 10.5% for the fiscal year 2021-22 and 11% to 11.5% for the first half of the fiscal year 2022-23.
On yearly basis, inflation is expected to remain in the range of 11.5% to 12% for the end of June 2022 and 8.5% to 9% for December 2022.
Going into the details, inflation will be at its peak in October 2022 and then gradually decline in November and December 2022. From November 2021 till October 2022, inflation is expected to follow an increasing trend while YoY inflation is likely to remain at a peak in August 2022 and then decline significantly from September 2022 to December 2022.
The YoY inflation for December 2022 will likely remain between 8.5% to 9.0%.
However, it is important to mention that the decline will predominantly be the reflection of high base impact, as month-on-month growth in CPI is still expected to be positive for the period while on the yearly basis, it is likely to fall significantly.
PIDE forecasts inflation to remain substantially higher, compared to the forecasts made by the State Bank of Pakistan (7% to 9%), International Monetary Fund (8.5%), and Asian Development Bank (7.5%).
The CPI inflation is to persist in double digits till December 2022 with an upward momentum through the remaining part of FY22 and the first half of FY23. There will be a significant upward revision in the SBP’s inflation forecasts which would be 9% to 11%, the report noted.
Despite being significantly higher than forecasts from other institutions, PIDE’s forecast is perfectly in line with the results of the Survey of Industry Experts (SIE), conducted to ascertain the collective view of experts, on the future inflation and growth trends. More than 80% of the respondents expected that inflation for FY22 will remain between 9.5% to 11%. Respondents also believe that inflation will remain in double digits for the next two fiscal years and will only be back in the single-digit in FY24. Survey participants also expect GDP growth to remain between 4% to 4.7% for the next several years.
The report portrays that persistence in inflation will further rise in the next five quarters. Out of 94 composite commodities, around 70 commodities are projected to continue with double-digit inflation. Out of these 70, more than 25 commodities are projecting more than 14% inflation.
PIDE also anticipates inflation to remain broad-based – both food and non-food contributing to high inflation.
On the monetary policy front, PIDE suggests an immediate adjustment in the policy rate by at least 75 basis points. The increasing trend of inflation with high persistence and broader base supports PIDE’s suggestion.
In addition, PIDE’s inflation forecasting models anticipate a 1% increase in electricity prices, translating into an 8% increase in fuel prices. Given the prior information, Pakistan requires at least a 14% increase in electricity prices to overcome the crushing burden of ever-increasing circular debt.
The report also introduces an additional shock of 13% in the next five months and found that with the full adjustment of electricity shock, inflation could go up 0.43% for FY22 and 0.66% for the first half of FY23. Similarly, the additional shock of 10% in fuel prices could further push the inflation by 0.32% for FY22 and 0.46% for the first half of FY23.