Rebasing the inflation index tamed down inflation in August 2011 to 11.56 percent compared to the tally of 12.5 percent which it would likely have touched had the previous base been used. The new weights are in line with the changing consumption patterns of the past decade. The weight of the food index has been reduced from 40.34 percent to 34.83 percent under the revised base. With food items being the main culprit behind rising price levels for the last couple of years; lower CPI numbers under the new base come as little surprise. The reduction in inflation numbers is evident from the fact that CPI recorded in July was 13.77 percent, however, after the rebasing; the average inflation for Jul-Aug 2011 stands at 11.99 percent which implies that inflation in July was revised to 12.42 percent. Given this pattern, SBPs forecasted inflation level of 11.5-12 percent for FY12 may also be revised downwards by 1-1.5 percent. It would be interesting to see how this would impact the interest pricing decision in the upcoming monetary policy review. The stage appears set for a further cut by 50 basis points. Within the core components; the house rent index has now been changed to housing, water, electricity, gas and other fuels with its weight increased from 23.43 percent to 29.41 percent. Although the detailed weight break up is not available; seemingly, the index is a better reflection of actual spending on house rents and utilities than the previous which was more of a reflection of construction material prices. It increased by 7.94 percent on yearly basis while the monthly surge was recorded at 1.12 percent. The house rent index which was on a constant decline, had started moving up in past few months and was expected to continue rising. However, following the change of its composition may alter this trajectory in coming months as it increased by just 8.94 percent in July. The wieghtage for clothing and footwear (in previous index - apparel, textile and footwear) has been increased from 6.1 percent to 7.57 percent, which implies that people are spending more on outfits. It inflated by 13.69 percent, exhibiting the lagged impact of increases in input commodity prices (cotton and leather) on final products. Transport and communication have been bifurcated into two separate heads with 7.20 and 3.22 percent weight each; instead of the combined weight of 7.32 percent under the previous formula. This makes sense given the increased numbers of cars and motor bikes and the fact that nowadays virtually everyone is carrying a mobile phone. However, the surge in both prices has been divergent - transport owing to high oil prices soared by 14.37 percent on yearly basis; while intense competition in the cellular industry restricted the price increases in the communication group to just 1.15 percent. Although core inflation surged to double digits for the first time in this calendar year; the overall trend of inflation has been relatively tamed. Coupled with an improved current account position, despite the sharp fall in the value of the local currency against US dollar, the rebasing appears to have built the argument for further monetary easing. Rebased 2007-08
========================================================= CPI grouping by Weight Group Weight (%) --------------------------------------------------------- Food & non-alcoholic beverages 34.8 Non-perishable food 29.8 Perishable food 5.0 Clothing & footwear 7.6 "Housing, water, electricity, gas & other fuels" 29.4 Transport 7.2 =========================================================
Old base 2000-01
========================================================= Group Weight (%) Food & beverages 40.3 Non-perishable food 35.2 Perishable food 5.1 "Apparel, textile & footwear" 6.1 House rent 23.4 Fuel & lightening 7.3 Transport & communication 7.3 =========================================================
Source: FBS
Comments
Comments are closed for this article.