Inflation: 32-month low, but can it hold?

The break back trend of inflation appears to be relenting. The most recently reported inflation data shows that the CPI inflation has dropped to its lowest level in 32 months, being limited to single digit for the second month in a row. The bucking trend has also solidified the central banks intent for lowering rates, as it slashed the discount rate by 150 bps, in its most recent Monetary Policy Announcement.
However, the magic is mostly attributable to the high base effect due to high inflation in recent periods, while consumer prices climbed by 0.9 percent during August 2012.
Still, prices of food and of energy have shown some respite of late. The food index has increased by 8.1 percent YoY, while transport rates have increased by a relatively stymied 4.5 percent over the past 12 months. Housing, electricity, gas and fuel sub indices which constitute about a third of the CPI index, have also depicted similar trends.
The Sensitive Price Index and the Wholesale Price Index have both averaged fewer than eight percent over the first two months of the ongoing fiscal. So it appears that the rate of increase in consumer prices may also be relatively subdued going forward. In turn, this improves the likelihood of further downward revisions in the policy rate by SBP.
The impact of low inflation is apparent on core inflation too - both NFNE and trimmed inflation numbers were below 11 percent in August. But trimmed core inflation surged by 1.3 percent on monthly basis.
But the receding trend of inflation may be exacerbated by two conundrums, the first of which is the surge of 5-7 percent in petroleum prices. Secondly, food prices may be prone to supply shocks going forward considering the less than ideal rainfall reported in Kharif crop areas and climactic disruptions in other regions.

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MAJOR CPI GROUPS - AUGUST 2012

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                                           Y/Y chg (%)    M/M chg (%)

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CPI general                                    9.10              0.90

Food & non-alcoholic beverages                 8.14              0.97

Non-perishable                                 7.25              0.11

Perishable                                    13.36              6.04

Housing, water, elec, gas & other fuels        4.42              0.02

Clothing & footwear                           15.57              0.94

Transport                                     15.41              4.50

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Source: PBS

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