Inflation: the struggle continues

Crossing the 12 percent mark for the first time after ten months, the year on year increase in CPI for May 2012 was above expectations at 12.29 percent. The year-to-date CPI, which had been decreasing initially during this fiscal year, had also started increasing in the last few months. During July-May FY12, it clocked in at 10.98 percent, as opposed to 13.69 percent during the same period of last year. The month-on-month analogy revealed some interesting highpoints. At a 1.15 percent increase in May 2012s CPI relative to the previous month, it was the perishable food group that showed a marked decline relative to the previous month. This sub-index has shown a lot of month-on-month fluctuations this year, and had risen by a whopping 8.3 percent in April 2012 relative to March 2012. This decline in perishable food items was led by a significant decrease in tomato prices - over 56 percent - as well in that of onions and other fresh vegetables. Ironically prices of fresh fruits increased by about 15 percent on a month-on-month basis. The erratic month-on-month change witnessed throughout this fiscal year in perishable food commodities is a reflection of the rampant supply chain and market inefficiency in the industry. The housing, water, electricity, gas, fuel sub-index was also the highlight in May, having recorded a nearly 3 percent increase on a month-on-month basis. This could be explained by the increase in electricity tariff announced in mid-May, leading to a 16.4 percent month on month increase in the electricity index in this sub-category. As expected because of no announced-change in fuel prices at the beginning of May, the transport sub-index did not show any significant increase and rather showed a marginal decrease of 0.01 percent. With the decrease in fuel prices announced by OGRA at the beginning of this month, the transport sub-index is likely to show a further month on month decrease going forward. A sub-category, which though does not carry much weight in the CPI basket, has shown a significant month on month increase that warrants attention - recreation and culture. Delving into its sub-categories reveals a whopping month on month increase in the prices of textbooks. Ironically these are not included in the Education sub-index, which showed a month on month decrease. The CPI numbers for 11MFY12 came just before the FY13 budget was announced by the government and the very next day after the 2011-12 economic survey was released. FY12 had been quite a significant year for the economy of Pakistan as far as inflation is concerned, as the base year of price indices was changed from 2000-01 to 2007-08. The move involved the revision of the basket of commodities in the CPI - an increase from 374 to 487 items and from 10 to 12 commodity groups - as well as an increase in the cities covered from 35 to 40, amongst various other changes. For much of FY12, inflationary trends stayed controlled. This could be partly attributed to the high-base effect due to Great Floods that took place in the first half of FY11. In line with this, year on year inflation declined steadily for the first half of FY12 and declined subsequently uptil April. Non-food inflation has stayed at double-digit levels for most of FY12, rising particularly during the last few months owing to the upward adjustment of energy, gas and fuel prices. Food inflation, meanwhile recorded an average increase of 11.1 percent during July-April FY12, which is greater than the average increase in non-food prices. Supply-side disruptions caused by the floods in Sindh, and demand-side pressure caused by monetary expansion were responsible for driving up food inflation to a great extent. Overall, the inflation target of 12 percent for this fiscal year looks set to be met. Expectations of better crop production in the coming fiscal year lend hope that food inflationary pressures may stay contained during FY13. However, the movement in international commodity prices, especially oil, will also influence inflation for the coming fiscal year. Because FY13 is an election-year budget and is an expansionary budget for the economy, it will not be surprising to find a persistence of inflationary pressures in the economy and for inflation to stay at double-digit levels.