CPI inches up

The inflation dragon is gaining size. With a pick of 1.3 percent on monthly basis in July, the benefit of base effect is eroding fast. This is the second time in four months where CPI is up by over one percentage point. That is not good for the prospects of SBP’s forecast of inflation between 4.5-5.5 percent on yearly basis - for July 2016, it was recorded at 4.1 percent.
The only good news is that SBP did not ease the policy any further in the last week’s review. Now it seems like there is an end to the easing cycle, with policy rate at 5.75 percent.
Higher inflation in July is based on two factors - one is too high perishable food prices and the other is quarterly revision in house rent index. The latter is computed once in three months and it explains higher inflation every four months. In April, monthly inflation was up by 1.5 percent and yearly number jumped by 4.2 percent.
The data of perishable food items also has a tale to tell - the sub index increased by 14.6 percent as compared to the prices in the previous month. The story was similar in April when the perishable food prices were up by 12.3 percent on monthly basis. But there is a difference - in April the yearly increase of sub index was mere 3 percent as the base effect was too high to compensate one off increase. However, the advantage is eroded now and the perishable food prices up by whopping 14.1 percent on yearly basis in July.
This trend explains that another month or two of high monthly inflation could take the yearly number north of 6 percent. This may seriously challenge the government’s target of 6 percent and SBP ought to revise its forecast and perhaps its monetary policy stance.
Nonetheless, if inflation cycle reverts to mean, the situation may remain in control. And chances of it are high. There is not much upsurge in food prices in the last recordings of SPI weekly index which suggests that the rising trend of food prices may be arrested temporarily.
In case of non food items, 1.25 percent increase in house rent index is the highlight which has increased by 5.8 percent on yearly basis. The house rent comprises of one fifth of CPI basket and there are serious doubts on its computation, as empirical evidence suggests its increase is nothing less than 10 percent yearly.
There is no other significant change in prices of other items as within food index, non-perishable items did not increase out of proportion to make the overall food index to increase by 2.7 percent monthly and 3.9 percent yearly. The core inflation jumped by 4.5 percent while the trimmed core inflation was up by 3.6 percent on yearly basis in July.
In a nutshell, inflation is starting to pick up; but there is not much to worry in short term. However, the risks are heightened. Any upward movement in international prices can trigger supply side inflationary pressure. While on the demand size, higher M2 growth emanated from growth in NDA can build inflationary pressure. Hence, a prudent approach is too run a cautious monetary policy stance, going forward.