Headline inflation declined to 5.65% YoY (down 0.21% MoM) in January, compared to 7.97% YoY in December, beating market expectations of around 6.0% YoY.

Most of the sequential decline in inflation was on the back of a 2.65% MoM drop in food inflation, which had until recently been in the spotlight given its impact on the lower-income segments. Key items in the food basket that recorded declines during January were chicken, eggs, various vegetables and spices.

On the other hand, house rent recorded its highest MoM increase in recent years, which was possibly on account of continued normalization of activity after the pandemic.

Refreshingly, the decline in January was more pronounced in Rural CPI (-0.29% MoM) compared to Urban CPI (-0.16% MoM), where the former had continuously been trending higher in the previous months (7MFY21 R-CPI: 10.02% YoY vs. U-CPI: 6.98% YoY).

Cumulatively, headline inflation stands at 8.19% for 7MFY21. Considering the high base effect lasts till Mar-2021, it seems likely that headline inflation will comfortably average within the SBP’s estimate of 7-9% during FY21.