Despite the fact that the monthly surge in prices has remained well above one percent since the start of this fiscal year, the yearly increase stood at just 10.96 percent in October and 11.35 percent for July-Oct. Thats how a high base effect draws down official inflation rates to deceptively low levels. But this anomaly will soon disappear as by December the low base effect will be largely mitigated. CPI surged by 1.44 percent in October compared to the previous month. This came as a surprise to analysts whose consensus estimates for the price surge in this period was about 50 bps lower than what it turned out to be. The deviation is based on the relatively low correlation between CPI and SPI that may also be an externality of the recent rebasing. Food inflation is the usual suspect, keeping the central bank from reigning in overall inflation. There are many factors contributing to the persistent increases in food prices, including the impact of the floods in Sindh, poor market mechanisms along with the seasonal impact of Eid on food prices. Since a third of the wieghtage in the CPI index is attributed to food and beverages; rising prices of these products took the CPI index higher by 1.72 percent in the outgoing month and 11.75 percent when compared on an annual basis. Housing, water, electricity, gas and fuel which have been assigned similar weights are also surging. Despite monthly hike of 1.5 percent in the sub index, it grew by a mere 7.5 percent on yearly basis. This high base effect may not persist; but hikes in rents and tariffs may contribute to high inflation in coming months. Since prices of crude oil also increased by an average of 0.6 percent during October compared to the preceding month, it is imperative that electricity tariffs will witness similar hikes going forward. Add to this the impact of rising house rents and it is evident that the contribution to inflation from these sub indices will likely persist in months ahead. A similar pattern can be seen in the transport sub index which surged by 13.95 percent in October compared to the same month, a year earlier. However, it is heartening to see oil prices heading south in the month of November. The wholesale price index also has some good omens in store as that index inched up by a relatively stymied 0.37 percent in October, compared to the preceding month; and 15.41 percent when compared to the same month last year. This trend suggests that the walloping pace of retail prices will also slow down from December onwards. Core inflation exhibited similar increases rising 1.4 percent over the previous month and 10.4 percent compared October 2010. However, the trimmed core surged by 11.7 percent, quite close to the policy rate. On the whole, inflation numbers are encouraging and seem to lend credence to the central banks decision to assume a dovish stance in its latest monetary policy statement. In a recent interview with BR Research, SBP governor Yaseen Anwar had contended that the reduction of 150 bps in the policy rate was aimed at keeping real interest rates at zero percent. If this logic is to be followed going forward, the central bank may have to tighten the policy rate up a few notches once again, come January.
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CPI October 2011
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Group Weight (%)yoy chg (% chg (%)
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General 100 10.96 1.44
Food & non-alcoholic beverages 34.83 11.75 1.72
Non-perishable food 29.54 14.18 1.36
Perishable food 4.99 0.43 3.71
Clothing & footwear 7.57 15.21 1.53
Housing, water, fuels 29.41 7.47 1.51
Transport 7.2 13.95 1.49
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Source: FBS
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