UNITED BANK LIMITED
Inflation
Inflation on upswing
Energy tariff, food and transportation
drive CPI inflation
According to official figures on inflation released by Federal
Bureau of Statistics (FBS), CPI inflation for Jan’10 rose to
13.68% year-on-year (YoY) compared to our projection of
12.90%. Prime driver behind this was 13.44% month-on-
month (MoM) rise in fuel and energy prices during Jan’10,
with 15.88% and 15.68% MoM rise in Electricity and Natural
Gas subsections respectively.
The rise in CPI was further fueled by Food, up 2.0% MoM.
This, however, was to some extent expected as -1.7% MoM
decline in food inflation for December’09 reflected respite in
markets after Eid-Ul-Adha. January’s food inflation figure
includes market’s upswing from that respite, with prices of
Eggs and Sugar going up 28.43% and 20.64% respectively
MoM. Transportation was a third, expected, driver for
headline inflation, increasing by 2.96% MoM, on account of
recent increase in petrol and diesel prices.
Prices at manufacturer level (gauged by WPI) increased by
19.64% YoY in January’10 (up 423 bps MoM). SPI also
climbed up by 320 bps MoM, to 17.76% reflecting price
pressures depicted in CPI.
Table 1 – Snapshot of key inflation measures – January ’10
∆ YoY ∆ MoM
CPI 13.68% 2.42%
WPI 19.64% 4.23%
SPI 17.76% 3.20%
Source: FBS
Looking forward
Second round impacts of tariff increases imposed on Gas and
Electricity are likely to keep CPI Inflation around 13.8% YoY in
February. Further, increase in power tariff expected in
April’10 should keep upward inflationary trend strong in Jan-
Jun’10. This coupled with rise in transportation costs on
account of upward petroleum price adjustments and higher
energy costs will lead CPI Inflation to average 14% for Jan-
Jun’10 period.
Recent SPI figures show continuing persistence of inflation,
up 0.36% week-on-week (WoW), which is congruent with this
picture, although much lower than figures for first week of
January’10, at 2.2% WoW.
1|U B L R e s e a r c h
Economy Update - February 11, 2010
Chart 1 – CPI inflation and discount rate
14%
12%
10%
8%
Oct-09
Jan-10
Mar-10
May-10
Jun-10
Aug-09
Apr-10
Jul-09
Sep-09
Nov-09
Feb-10
Dec-09
CPI Projected CPI Discount Rate
Source: FBS, SBP, UBL Research
Interest rate outlook
We believe that prospects for Jan-Jun’10 remain challenging.
Increases in energy utility prices, transportation costs,
subsequent food inflation and other secondary effects
provide significant upside risks to inflation. On the back of
higher than expected CPI Inflation for January’10, we
perceive that average inflation for Jul’09-Jun’10 period may
well be in the range of 12.0%-12.25%. We are of the view
that persistence in inflationary pressures, continued weakness
in exchange rate and further delays in external assistance
may prompt State Bank of Pakistan (SBP) to re-asses status-
quo on interest rates.
Syed Murtaza Hasnain
Research Analyst
+92 (21) 99033-2898
syed.hasnain@ubl.com.pk
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