Uptick in inflation is worrisome

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Pakistan’s annual inflation rate edged up to 3.97 percent in November from 3.80 percent a month earlier, the state Bureau of Statistics said on Tuesday. On a month-on-month basis, inflation stood at 0.37 percent in November over the previous month, the bureau said.

Food items such as chillies, eggs and the price of diesel were the main reason behind the increase in month-on-month prices.

Unfortunately, the above-mentioned figures show that inflation has started rising significantly once again from the very low rate currently. Financial gurus fear that depending on the magnitude of impact of the factors like rising prices of petroleum and food items, the monthly (year-to-year) increase by June 2018 in the CPI could approach 7 to 8 percent. This could rise even further and reach double-digits by December 2018.

CPI inflation reaches five-month high of 4pc on high oil, food prices Annual inflation reached five-month high of four percent in November as food and oil prices increased. Pakistan Bureau of Statistics (PBS) data showed on Tuesday that consumer price index (CPI) inflation clocked in at 3.8 percent year-on-year both in October and November 2016.

PBS recorded annual inflation at five percent in May as demand ramped up along with prices of oil and international commodity. But, it edged sharply down to 3.9 percent in June due to slowdown in economic activities.

CPI inflation increased 0.4 percent in November as compared to an increase of 0.7 percent in the previous month and increase of 0.2 percent in November 2016. In July-November, average CPI inflation stood at 3.59 percent as compared to 3.92 percent in the corresponding period a year earlier.

The central bank expected a rise in inflation in the coming months due to higher international oil prices along with pass-through to domestic petroleum prices and imposition of regulatory duty on non-essential import items. Inflation is still expected to fall inside the range of 4.5-5.5 percent projected at the start of FY18,” the State Bank of Pakistan (SBP) said in a two-month monetary policy announced in late November.

SBP kept its key policy rate unchanged at 5.75 percent – the level that has been maintained since May last year in line with its pro-growth approach and to help the government achieve six percent growth target in FY2018. Analysts do not expect an interest rate hike through the current fiscal year of 2017/18. Inflation is expected to cross five percent in the later part of FY18 that can prickle market sentiments, they say.

Our FY18 inflation projection implies a comfortable real interest rate spread of 135 basis points, which will refrain monetary policy committee from interest rate hike at least till June next year, it is feared by the analysts.

PBS data further showed that food prices, which recorded rise in November over the same month a year ago, included onion (187.02pc), tomatoes (107.51pc), rice (14.10pc), eggs (12.94pc), betel leaves and nuts (11.34pc), tea (10.73pc), meat (7.2pc), honey (7.24pc), readymade food (6.38pc) and fresh fruits (6.27pc).

Non-food items that witnessed increase in November over the same month a year earlier included drugs and medicines (15pc), education (12.4pc), motor fuel (11.81pc), kerosene oil (10.23pc), tailoring (7.89pc), medical tests (7.14pc), construction wage rates (6.97pc), personal equipment (6.77pc), cleaning and laundry (6.58pc) and house rent (6.49pc).

Food items that registered increase in November over October included eggs (30.09pc), potatoes (5.66pc), betel leaves and nuts (4.75pc), tomatoes (3.61pc), wheat flour (1.99pc), chicken (1.95pc), fish (1.64pc), wheat (1.63pc), dry fruits (1.58pc), honey (1.39pc) and bakery and confectionary (1.19pc).

Non-food items that recorded a rise in November over October included kerosene oil (4.71pc), motor fuel (2.22pc), personal equipment (2.18pc), woolen readymade garments (1.53pc), blades (1.52pc), education (1.39pc), medical tests (1.19pc), furniture (1.02pc) and tailoring (0.91pc).

Consumer Price Index (CPI), which tracks the prices of around 480 commodities every month in urban centers across the country and is the most important indicator of price movements, inflation remained at 3.8 percent in November, 2017, compared to the same month a year earlier due mainly to an increase in the prices of perishable food items.

The gradual uptick in inflation is worrying. This is so because even if the prices continue to increase at a slower pace, this would have a negative impact on the lives of ordinary people and the poor who spend a large part of their incomes on food items and are just surviving. The real value of savings will also erode to the extent of inflation.

The government could also be the loser as continued inflation in the economy could constrain the monetary authorities to raise the policy rate, putting more pressure on the budget. It needs to be mentioned that the present level of inflation is not likely to soften anytime soon. The government has raised the domestic prices of oil products and this is going to have a negative impact on the overall price situation. Consensus is also developing to limit oil output levels in the international market which could further force the government to increase the domestic oil prices in the coming months.

The government has also recently increased regulatory duty on a large number of imports and this would also put more pressure on the rate of inflation. All of this means that although the price situation is still under control, the government needs to monitor the behavior of inflation closely and try to take appropriate measures if inflationary pressures in the economy begin to re-emerge.

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