August Inflation at 10.5%, Base Year Changed, indicating Interest Rates to stabilize

The Mint PK

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Economy

August Inflation at 10.5%, Base Year Changed, indicating Interest Rates to stabilize

In a bold signalling move, the Government has changed the Base Year for CPI calculation from 2007-08 to 2015-16. This action led August CPI Inflation to come at 10.5%YoY as per new methodology considerably below the inflation of 11.6% calculated under the old methodology.

Previously, The Mint Pk has estimated August Inflation to remain around 11.5%. Hence, changing of Base Year and alteration in weights has reduced the inflation for the Fiscal Year 2019-2020.

As per new methodology, CPI will consist of Urban CPI and Rural CPI. Urban CPI will cover 35 large cities and 356 consumer products. While The Rural CPI will cover 27 rural areas and 244 consumer products.

Under the new methodolgy, CPI will be calculated by taking a weighted average of Urban and Rural CPI. While the weights for Non-perishable goods, Beverages, housing, Transport, communication and education has also been reduced. 
Furthermore, weightages for Housing, water, electricity, gas and fuels index has been reduced significantly from 29% to 23%. While Weightage for Transport index has been reduced to 5.91% from 7.2%.

As per proposal from Pakistan Bureau of Statistics and directives of the cabinet, the change in CPI methodology is applicable from July’2019. The July-2019 inflation which was previously reported at 10.3%, has been revised to 8.38% taking Average Inflation for July-August period to 9.44%.

Further clarity is awaited regarding new methodology of CPI Calculation as details havent been issued yet.

Inflation and Interest Rates Outlook 2019-2020

We at The Mint PK believes that changing of base year to 2015-16 and reducing weights of Utilities (which has risen drastically in the last six months) will result in CPI Inflation considerably below the previous estimates. IMF has previously estimated that Average inflation to touch around 13%, while State Bank of Pakistan has estimated Inflation around 11% based on old Methodology. 

However, with the new methodology, Inflation is expected to average around 10% for the Fiscal Year 2019-2020 period. This will lead to Positive Real Interest Rates of up to 4%, making a strong case of Interest Rates to stabilize at current level (Discount Rate:13.75%).

By changing the methodology, SBP and the Ministry has signalled to the market that Interest Rate has peeked and a gradual decline may be possible sooner than expected.

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