SUNDAY APRIL 03: New tax measures, hike in POL prices: SBP warns of high inflation

April 04, 2011

RECORDER REPORT

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The State Bank of Pakistan on Saturday warned that latest taxation measures and increase in domestic prices of petroleum products will raise inflationary pressure on the economy.

According to the SBP Inflation Monitor, in February 2011 the number of cities having above average inflation was similar to January-2011 and out of 35 cities, 22 had over 12.9 percent inflation (average inflation) in the month under review compared to 19 cities recording higher than the average inflation (13.0 percent) in the corresponding month last year.

The detailed analysis revealed that Kunri (Sindh) observed the highest food inflation (23.8 percent) during February 2011 whereas the second largest city - Lahore observed the lowest food inflation (12.8 percent) during the period. In addition, Bahawalnagar saw the highest (16.3 percent) and Islamabad the lowest non-food inflation (3.6 percent) during the month under review. The largest city of the country - Karachi - observed 16 percent food inflation and 6.4 percent non-food inflation during February 2011.

According to the Inflation Monitor in February 2011, for the first time in the current fiscal year both Consumer Price Index (CPI) and Sensitive Price Indicator (SPI) inflation decelerated for three straight months; partly because of no increase in domestic oil prices, and partly due to easing food group prices.

However, easing a little more, inflationary pressure in the economy remained firm during the period under review, as is evident from consumer price index and sensitive price indicator. The CPI headline inflation dropped from 14.2 percent in January 2011 to 12.9 percent in February 2011 on YoY basis. Inflation measured by SPI easing for the third consecutive month, dropped to 16.2 percent in February 2011 from 18.4 percent last month. The ease is largely attributed to improved supply of food related items such as potatoes, tomatoes, onions, and vegetables.

However, according to the SBP, declining trend may be reversed in the months ahead considering the recent increase in domestic prices of petroleum products, upward adjustment in electricity tariffs, rising building material prices and latest taxation measures to improve government revenues. Income group-wise price movement data shows that inflation hurts the poor relatively more than the rich. In February 2011 the three lower income groups faced higher inflation than overall inflation. The highest income group experienced higher than average food and non-food inflation during February 2011. Interestingly, the group at number three in the income bracket seemed least affected during the month, it added.

According to the SBP, diffusion of core inflation (non-food non-energy) jumped during the month under review to 53.9 percent against 47.0 percent in January 2011. Inflation diffusion in some of the group indices showed the similar peaks that Pakistan experienced in CY 2008 (a high inflation period).