Anticipated Drop in Inflation to 26% in October, Predicts JS Global Brokerage House

Expectations are high for a substantial decrease in Consumer Price Index (CPI)-based inflation for October, with a forecast of 26.4%, down from the 31.4% recorded in September. This optimistic projection comes from the reputable brokerage house, JS Global, which made the announcement on Monday. 

JS Global's analysis for October 2023 suggests a significant month-on-month (MoM) slowdown of 70 basis points (bps) in the headline inflation rate. This is a considerable improvement from the previous 12-month average of approximately 230 bps MoM. Should this forecast hold true, it would bring the CPI for October 2023 down to 26.4%, marking the lowest inflation rate since January 2023, according to JS Global.

This expected monthly decline is attributed to reduced petroleum product prices, which have, surprisingly, had a ripple effect on food prices – a departure from historical patterns. JS Global's data indicates a predicted 89 bps MoM reduction in food inflation, representing around 35% of the CPI. However, this trend is not expected to extend to the restaurant segment, which makes up approximately 7% of the index, with an anticipated increase of 145 bps MoM in inflation.

Furthermore, the anticipated relief in food prices may be offset by the quarterly house rent adjustment and an MoM increase in electricity prices, resulting in a 4.7% MoM inflation increase in the housing, water, electricity, gas, and fuels segment, constituting roughly 23% of the CPI. This projection does not take into account the recent approximately 8% reduction in petroleum product prices.

projection for the average CPI over the next 12 months

JS Global also shared its projection for the average CPI over the next 12 months, estimating it at 19%. This reflects a positive real effective interest rate of 300 bps and accounts for the absence of negative CPI surprises.

In the midst of these economic changes, the brokerage house highlighted the base effect, which has been complemented by the recent appreciation of the Pakistani rupee against the US dollar and some relief in international oil prices.

Notably, with the impact of the higher base effect expected to become more prominent in the coming months, particularly beyond January 2024, some quarters of the market are beginning to anticipate an earlier commencement of the monetary easing cycle than previously expected.

JS Global emphasized the importance of the forward-looking CPI as a key consideration for the State Bank of Pakistan's monetary policy. While the base case scenario points to the first rate cut announcement in March 2024, when real effective interest rates are expected to turn positive on a spot basis, the possibility of an earlier cut is not ruled out, as it hinges on the bank's assessment of the evolving economic landscape.