Decembers lower-than-expected inflation left many analysts surprised yesterday. The data released by the Federal Bureau of Statistics showed that inflation edged 10.52 percent higher as against consensus estimate of 11.8 percent. But, of course, it doesn mean that prices have actually tamed and all is now sanguine.
After having found its bottom in October, consumer prices have started rising again, thanks to lower base effect and resurge in food and fuel prices. So why the 0.49 percent month-on-month decline in December CPI? The answer to that lies in the details.
At one end, the fall is due to a continuous slide in house rent costs, which eased to its lowest in many months (14.23%); and at the other end, it is due to food prices that slipped 1.75 percent month-on-month.
Owing to Ramazan, two Eid festivals and a sugar crisis, the heavyweight food index had pushed CPIs monthly average to 1.2 percent in the first five months of FY10 as compared to 0.8 percent in the second half of last fiscal year. But with food prices subsequently slowing, this came under control last month.
Offsetting this decrease, however, is the rebound in global crude oil prices, which implies higher imported inflation going forward, that will not only jack up transportation costs (and all the goods that are transported along with it) but will also increase electricity tariffs which have already been raised 35 percent so far, in accordance with IMF conditionalities.
As the second round of cost-push inflation peaks out, however, core numbers (non-food & non-energy) continue to lose their steam, giving monetary officials a sigh of relief. This coupled with IMFs concerns over lower economic activity and weak private credit despite cuts in the policy interest rate, may allow State Bank officials to explore possibilities of a rate cut in upcoming SBP reviews.
But that doesn mean that the rate-cut hopefuls should start partying in advance, because for a central bank - and that too which is working right under the gaze of IMF - its never too early to fear inflation.
A pause in monetary softening seems but inevitable, considering that the economy is marked by low domestic savings which, in the absence of foreign private savings, gives money managers all the more reason to keep interest rates uppish in order to be able to help their fiscal counterparts plug-in the yawning budgetary gap.
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