Earlier gains undermined as inflation resurges to over 7pc

Business

ISLAMABAD: Influenced by faster rupee depreciation and demand pressure, inflation resurged to 7.2 per cent year-on-year in January, undermining earlier gains, according to data released by the Pakistan Bureau of Statistics (PBS) on Friday.

The country’s inflation has now crossed the four-year high of 6.78pc recorded in October last year — the period when global oil prices started declining. Inflation posted a marginal fall in November and December owing to a decline in prices of fresh vegetables and fruits in major urban centres.

The government has projected a 6pc annual inflation for the fiscal year 2018-19, but the figure has already crossed in the month of January. The average inflation was 3.92pc in FY18 and 4.16pc the year before.

PBS data cites faster rupee depreciation, demand pressure as reasons

The State Bank of Pakistan’s (SBP) tightening monetary policy has come on the back of the rising inflation amidst depreciating rupee and high global crude prices in the last two years. Policy rates are already at their six-year highs, after the SBP raised the key rate by 25 basis points to 10.25pc on Jan 31 this year. The central bank has raised interest rates by 4.50pc since January last year.

On the face of it, the most dominating push to inflation came from non-food-non-energy (core inflation) component which typically represents the underlying demand pressures on the economy. Core inflation, measured by excluding volatile food and energy prices, was recorded at 8.7pc year-on-year and 1.1pc on a monthly basis. Core inflation has been steadily rising for the past couple of months despite tightening of monetary policy.

The gradual build-up of domestic demand is evident from the upswing in core inflation. Of the 89 commodity groups of CPI (Consumer Price Index), it covers the price movement of 43 items. Motor vehicle prices have increased because of the rupee depreciation. Upward trend in the prices of footwear and household equipments have also been reported.

In January this year, food inflation increased by 2.4pc on an annual basis and 0.3pc on month-wise. Prices of non-perishable food items were up by 4.7pc, while those of perishable products fell by 16.6pc.

According to the SBP’s first quarterly report, food inflation remained stronger than last year, as prices of major items such as wheat and sugar recovered from their depressed levels that had persisted throughout FY18. This recovery has come at a fiscal cost as subsidy-led exports played an important role in offloading surpluses.

Furthermore, the impact of fuel prices was also felt on most food items, as retailers passed on the impact of higher transportation costs to consumers. This impact was more pronounced in the case of milk and meat.

The food items whose prices increased the most in January included tomatoes (27.55pc), garlic (22.83pc), Brufen tablets (14.02pc), sugar (6.15pc), Flagyl tablet (5.51pc) and pulse moong (2.73pc). In the same category, however, prices of chicken declined by 18.06pc, potatoes by 15.01pc, peas by 11.36pc, lemon by 9.92pc, onion by 5.50pc, cabbage by 5.17pc and eggs by 1.27pc.

On the other hand, non-food inflation went up 10.5pc and 1.4pc on yearly and monthly basis, respectively. This clearly shows that the direct impact of fuel prices on inflation was also strong.

In the non-food inflation, prices of electricity increased by 8.48pc, LPG by 5.95pc and house rent by 2.38pc. However, in the same category, prices of petrol super fell by 5.07pc, high speed diesel by 3.84pc, bricks by 1.70pc, CNG by 1.07pc and iron bar 1/2” by 0.86pc.

Since 2018 was an election year, both the outgoing and incumbent governments were reluctant to raise prices significantly to avoid public criticism. The outcome is that the current level of petrol prices in the country continues to stay closer to the level that is observed across oil-exporting countries. Not only does this entail fiscal burden but it also maintains the domestic petrol demand at an elevated level.

According to the State Bank report, prices of transportation services were adjusted upward by 14.4pc — a double-digit growth after an interval of six years. The items that contributed the most to transport inflation were train fares for short distances (less than 100km), as well as fares of buses and air travel.

Prices of non-food items also remained under pressure on account of 10.04pc rise in education index, followed by 7.17pc increase in clothing and footwear and 11.59pc in housing, water, electricity, gas and other fuels during the period under review.

Leave a Reply

Your email address will not be published. Required fields are marked *