November 2010 Inflation Review

November 2010 headline inflation jumps marginally: In November 2010 CPI (YoY) inflation jumped marginally over last month to 15.48%. Jump in inflation was mainly driven by higher food prices and low base effect, making overall inflation seem significantly higher than 10.51% in the corresponding month last year. 5MFY11 CPI inflation averages at 14.4% compared to 10.3% in 5MFY10.

MoM inflation higher due to pre-Eid demand: On MoM basis CPI inflation jumped by 1.52%. The increase was quite likely witnessed due to higher pre-Eid ul Adha demand. Hence, next month should witness a lower jump in overall prices, as local supply continues to enter markets.

Core (trimmed) inflation jumps significantly: Core (trimmed) inflation recorded at 13.4% touched a 16-month high, indicating a broad based rise in prices in the economy, which further strengthens the case for prevailing tight monetary stance.

Outlook: Going forward, we expect food inflation will continue to soften as, food markets adjust and demand normalizes post-Eid. However, pressure will persist from power tariff hikes, RGST implementation, and particularly international oil prices (already touched USD90).

November 2010 headline inflation jumps marginally

In November 2010 CPI (YoY) inflation jumped marginally over last month to 15.48%.  A look at weighted average contributions reveals food items contributed the most (61.2%) to this YoY jump. Momentum mainly emanated from perishable food items category (17.5% contribution) as local food markets continue to adjust post floods. Combined with that, low base effect pushed overall inflation much higher than 10.51% in the corresponding month last year. 5MFY11 CPI (YoY) inflation averages at 14.4% compared to 10.3% in 5MFY10.

Pre-Eid demand triggering MoM inflation; Core (trimmed) inflation jumps significantly

On MoM basis, 1.52% CPI inflation jump was mainly attributable to higher pre-Eid demand. However, we believe the magnitude of this jump should subside next month, primarily due to higher supply continuing to enter the market. Meanwhile, core (trimmed) inflation recorded at 13.4% touched a 16-month high, indicating a broad based rise in prices in the economy. Unlike last month, it seems commodity driven inflation is starting to spill over into core inflation, which strengthens the argument for a tighter monetary stance, as already adopted by the Central Bank.

Tariff hike, RGST imposition & Higher oil prices to keep inflation in double digits

Going forward, we expect food inflation will continue to soften as, food markets adjust and demand normalizes post-Eid. However, pressure will persist from power tariff hikes, RGST implementation, and particularly international oil prices (already touched USD90) which will quite possibly entrench inflationary expectations.

Economic & Political News

Amendment to ST Act could be the only option

The government has the only option to amend the existing Sales Tax Act, 1990 to introduce reforms in the sales regime in case the National Assembly does not pass the General Sales Tax (GST) Bill 2010. The Federal Board of Revenue (FBR) has to introduce the amended Sales Tax Act Bill 2010 if the GST Bill 2010 is rejected by the Parliament.

Forex reserves decreased by $353 million

Due to slow foreign inflows and rising debt payments foreign reserves have plunged by USD353.5mn to USD16.39bn during the week ended December 4, 2010, as against USD16.743bn a week earlier.
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