August CPI delivers a deadly punch

Guess what Shahid H. Kardar got as a joining bonus? An inflation bomb. Almost Guess what Shahid H. Kardar got as a joining bonus? An inflation bomb. Almost coinciding with the date of his confirmation as State Banks new governor, the Federal Bureau of Statistics said that CPI inflation roared back in anger to 13.23 percent year-on-year, in August - its fastest rise since the April 2010.
But for Kardar this could be just the tip of the iceberg, as the complete picture of the flood-led damages is yet to unfold.
FBS data show that growth in consumer prices was mainly triggered by the food and beverages basket, which has about 40 percent weight in the overall CPI computation.
Food prices jolted upwards last month as a combination of Ramazan and the supply-side shortage caused by floods sent the price of perishable food items up by a whopping 29.9 percent month-on-month - its biggest rise in recent memory. Over July, the overall food basket became costlier by 5.1 percent.
In times of such crisis, good governance, through price and supply controls by checking hoarders, taking timely import decisions and other commodity management tools, is the key. But in the absence of good governance, as is the case at present, the central bank will eventually have to take a step.
And it appears that Kardar is cognizant of the fact. "My priority is to control inflation and ensure soundness and security of the financial system," Kardar told Bloomberg last week. His view, of course, must be supported by factors other than food.
Aside from the risks of soaring food inflation, there are risks that prices of textiles and footwear would get out of hand; the former because of damage to the cotton crop and the latter because of damage to livestock.
Then there is the dilemma of the hike in energy tariffs. If the government jacks up power prices, it would lead to inflation in the months ahead. And if it does not, for fears of a political backlash, it would be taking an excessive burden of subsidies, which in turn would stoke fears of deficit monetisation.
With the central bank due to review its policy rate later this month, the latest CPI numbers should be sending bond yields up and stock prices down, beginning today.
One can argue that since core inflation eased to 9.8 percent in August, the SBP might maintain the status-quo in its upcoming review. But knowing that the trimmed core inched up by 50 basis points to 12.5 percent (up 80 bps since June), maintaining the status-quo might not be a luxury, especially considering soaring food prices.
Agreed the central banks hands will be clipped for lack of adequate post-flood data of the economy, the benefit of doubt might be given to a rate hike, especially considering that votes were unanimous for a rate hike in SBPs last review. Clearly, its never too much to fear the inflationary dragon.