Inflation: single again

The last month of 2011 offered a major surprise in inflation numbers. For the first time in 24 months, year-on-year inflation clocked in a single digit at 9.75 percent last month. This was much below analysts expectations, which had been hovering around 11 percent for the month under review. On a month-on-month basis, negative inflation was witnessed in December 2011 at -0.70 percent over November 2011. The last time month-on-month deflation was seen was in February 2011, which was at -0.56 percent. A look into the sub-indices indicates that the decrease was led by the food category, which enjoys a nearly 35 percent weight in the CPI basket. The year-on-year inflation in the non-perishable category was the lowest so far this fiscal year at 10.82 for December FY12, while the category also registered a month-on-month decrease in inflation for the first time this fiscal year at -0.48 percent. As far as the perishable food category is concerned, a marked month-on-month decrease of -12.02 percent was seen last December. This is primarily attributable to the fall in prices of vegetables such as onions, tomatoes and potatoes, as well as fresh fruit and chicken. Overall, food inflation dropped to the lowest year-on-year increase in December 2011, and also witnessed an overall month-on-month decrease for the first time this fiscal year. The next category worth mentioning is "housing, water, electricity, gas and other fuels", which holds a nearly 30 percent weight in the index. For the first time this fiscal year, the year-on-year inflation under this head went below 7 percent. A prominent factor that explains the decline in inflation in this category is that no electricity tariff adjustment was seen last December, owing mainly to no major change in prices of furnace oil, while gas prices were also not increased in the month under review. Similarly, the clothing and footwear category registered the lowest month-on-month increase in December 2011. For 6MFY12, average inflation at 10.87 percent was the lowest year-to-date average this fiscal year. Going forward, however, a slide in inflation numbers is not likely to come easily. This is due to concerns about the increase in gas prices in January 2012, which will also indirectly affect food prices via the incremental impact on fertiliser prices. Further, the increase in wheat support prices is also likely to reflect in the CPI figures in the coming months, with a month-on-month increase of 2.88 percent seen in wheat prices in December 2011. Yet, while these concerns abound, the fact that average inflation for 6MFY12 has registered at less than 11 percent means that there is a strong likelihood for the average inflation for FY12 to clock in at less than the 12 percent targeted by SBP.

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Major CPI groups - December 2011
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                                            Y/Y chg (%)   M/M chg (%)
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CPI general                                    9.75              -0.7
Food & non-alcoholic beverages                 9.53             -2.38
Housing, water, elec, gas & other fuels        6.45              0.09
Clothing & footwear                           14.86              0.83
Transport                                     13.62              0.62
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Source: FBS