In December, inflation is expected to surpass the 30 per cent threshold, driven by the recent increase in gas prices and the persisting adverse base effect, which continues to impact the consumer price index (CPI).
The headline inflation for December is projected to settle at approximately 30.11 per cent year-on-year (YoY) and 1.18 per cent month-on-month (MoM), in contrast to the previous month’s figures of 29.2 per cent YoY and 2.7 per cent MoM.
This monthly inflation rate is significantly lower than the 12-month average of 2.17 per cent MoM.
Consequently, the average yearly inflation for the first six months of FY24 is estimated to be 28.87 per cent YoY, compared to 25.05 per cent YoY in the same period of FY23.
The surge in inflation can be attributed to the adverse base effect and the notable increase in gas prices, which were not fully realised in the previous month.
Conversely, food inflation is expected to exhibit a marginal decrease of 0.29 per cent MoM, driven primarily by the decline in prices of tomatoes, potatoes, chicken, and oil.
Additionally, the transport index is forecast to undergo a 4 per cent MoM decrease, mainly due to the relief in petrol and high-speed diesel (HSD) prices.
Post-December, inflation is anticipated to decline at a relatively faster pace, supported by the favorable base effect, the delayed impact of monetary tightening, and other administrative measures.
The December spike is attributed to the lingering effects of the overdue gas price hike. Notably, unforeseen climate events, volatility in global commodity prices, especially oil, and external account pressures pose significant upside risks to the inflation outlook.
Global oil prices are on the rise amid challenges in Red Sea shipping, potentially threatening the inflation outlook.
Moreover, the successful completion of the International Monetary Fund (IMF) review, coupled with additional loan programmes, remains crucial.
The outstanding amount of $1.8 billion under the stand-by arrangement (SBA) is yet to be released.
The accompanying chart illustrates the yearly inflation trajectory based on different MoM CPI scenarios. At 0.5 per cent and 1 per cent MoM CPI, yearly inflation is projected to fall below the 22 per cent policy rate by February–March 2024.
By the end of FY24, with 0.5 per cent and 1 per cent MoM CPI, it is expected to decrease to 15.29 per cent and 19.37 per cent, respectively, a significant change from the previous month’s forecasts of 12.9 per cent and 17.5 per cent.
Considering the last 12-month average of 2.17 per cent MoM, the real interest rate is anticipated to remain in negative territory by the end of FY24.
