Pakistan's November inflation projected at 4.6%; another big rate cut expected in December

Inflation in Pakistan, which remained persistently high last year, is expected to maintain its downward trend in November due to the impact of a high base effect.

According to Nukta research, the inflation rate for November is projected to reach 4.57% compared to the same month last year. This would result in a real interest rate of 10.4%, providing Pakistan's central bank with ample space to implement another rate cut during the upcoming monetary policy meeting on December 16.

However, the inflation reading is expected to be 0.2% higher compared to October.

Pakistan Bureau of Statistics' weekly inflation data for the first week of November shows a 0.24% increase week-on-week (WoW) and a 13.89% rise year-on-year (YoY). This uptick was mainly attributed to higher food prices, with notable increases in the prices of eggs (up 2.70%), potatoes (up 2.63%), onions (up 2.61%), mustard oil (up 2.36%), and tomatoes (up 1.67%).

However, chicken prices continued their downward trend, declining by 1.23% WoW and by 13.4% compared to the figures reported in the October inflation review.

November inflation breakdown

The food index is expected to remain stable due to mixed trends within the basket, with some items seeing price increases while others experiencing a decrease. For instance, prices of wheat, eggs, mustard oil, moong dal, potatoes, and vegetables have risen, while chicken, bananas, mash dal, onions, and tomatoes have declined.

The housing index is expected to decrease by 0.4% compared to October due to the negative fuel charge adjustment (FCA) of PKR 1.28 per unit, which was approved for September and will take effect in November.

Additionally, the transport index is projected to rise by 0.9% in November due to the increase in petrol and diesel prices.

Lower QTA for 4QFY24

Nukta research shows that the requested Quarterly Tariff Adjustment (QTA) for 4QFY24 is significantly lower than the earlier projections.

Pakistan's National Electric Power Regulatory Authority has scheduled a hearing to review a shortfall of PKR 8,718 million, which includes PKR 8,065 million for capacity payments, PKR 1,252 million for other shortfalls, and PKR 1,653 million for system usage charges. Additionally, a negative amount of PKR 2,253 million is expected to be addressed under the transmission and distribution category in the monthly FCA.

The revenue shortfall will be recovered from consumers through electricity bills from December this year to February 2025, with an expected QTA adjustment of PKR 0.37 per unit. Currently, a QTA of PKR 1.74 per unit is in effect, which will end this month. This means that starting next month, the tariff is expected to decrease by PKR 1.37 per unit.

Additionally, the termination of Power Purchase Agreements (PPAs) and the conversion of some plant contracts from take-or-pay to take-and-pay arrangements will further contribute to a reduction in electricity prices, which is expected to help lower inflation. As per Nukta calculations, lower than expected QTA has a negative impact of approximately 50 basis points for December inflation.

Why did Oct inflation surpass street consensus?

For October, most analysts forecasted inflation to be between 6.3% to 7.0%, with Nukta also projecting it at 6.5%.

However, the actual reported numbers for October were 7.17%.

Three reasons. One, wheat prices rose by 4.5% MoM in October, with wheat flour prices also increasing by 4.5%.

Two, the government ended electricity relief for consumers using up to 200 units, causing the electricity index to rise by 5.0% despite a negative fuel charge adjustment (FCA).

Additionally, prices for vegetables and spices increased by 16% and 5%, respectively, during October.