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A break in CPI’s southward journey

Having enjoyed a southward trend since May 2012, inflation numbers decided to take a northward stroll last month, clocking in at 7.93 percent on a year-on-year basis. This brought the half-yearly CPI tally to 8.31 percent, which is still below the target of 9.5 percent set by the SBP for FY13.

It appears that the market had begun taking the downward CPI trend for granted, since the CPI figure was above market expectations, both for the year-on-year and the month-on-month figures. An increase in the tally for trimmed core and NFNE inflation also shows that food alone is not the only contributory factor towards the increased CPI levels this month.

Looking at the December-11 figures, the year-on-year increase in CPI appears to be the result of a low-base effect, as December last year witnessed an off-the-trend decrease for CPI in general.

Delving into the month-on-month figures shows a slight month-on-month decrease for the major CPI sub-categories of food, perishable food to be precise. Unsurprisingly, wheat and wheat flour depicted a month-on-month and year-on-year increase, plausibly in line with the increase in support prices of the commodity. Increase in prices of bakery items and cereals may be linked to a derived increase from wheat prices.

Potatoes, onions, fresh vegetables and fruits, and tomatoes largely led the month-on-month decrease in prices of perishable commodities.

The winter effect was obvious in the month-on-month increase is prices of goods particularly related to the season. Dry fruits, woolen readymade garments, woolen cloth, firewood and eggs provide cases in point for the winter-led price increase.

Prices in the ‘Housing, Water, Electricity, Gas and Fuel’ sub-category and transport, the next two major categories of CPI, however, showed only slight month-on-month increases.

As for the discount rate, riding particularly high on the monetary policy committee’s mind is the external position of the country aside from CPI, as stated in the last monetary policy statement of the SBP, “The overall stress in the external position…is increasing given the declining financial inflows and substantial debt repayments. Assigning appropriate weights to these competing considerations is the main challenge currently faced by monetary policy.”

In addition, the weak external position and the effects on the PKR-USD exchange rate also have a bearing on CPI. The SBP’s monetary policy statement further states, “The magnitude and speed of pass through of exchange rate changes to CPI inflation need to be monitored closely.”

Going forward, the high-base effect will likely keep CPI in single digits in the months to follow. What’s important, however, is that the southward momentum has been broken, which makes it likely for the monetary policy committee to put a break on any rate cut in the meetings to follow.

Having said the year-on-year increase in CPI seen last month is not likely to be repeated in January. This is because a significant month-on-month increase, of greater than 0.6 percent, will have to take place for the year-on-year rise to net at more than seven percent next month.


Major CPI groups - Nov 2012


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


CPI general 7.93 0.23

Food & non-alcoholic beverages 7.19 -0.07

Non-perishable 9.40 1.03

Perishable -5.52 -6.82

Housing, water, elec, gas & other fuel 4.12 0.06

Clothing & footwear 15.81 1.97

Transport 8.94 0.16

NFNE 9.80 0.50

Core Trimmed 9.20 0.30


Source: PBS