CPI’s rising irrelevance for discount rate

Contrary to market expectations of an increase in the CPI figure, it managed to surprise analysts once again with a southward turn.
With a year-on-year figure of 7.38 percent, the dive came again this fiscal year, contributing to the erratic movement that CPI figures have witnessed during FY13. February saw a return of the negative month-on-month figure again in FY13, having last been witnessed for November 2012.
Food products were leading this fall, with prices of both perishable and non-perishable commodities having gone down on a month-on-month analogy. In fact, for perishable food products, the decline was pronounced enough to amount to a year-on-year decrease in prices as well.
To some extent, a sharp increase in wheat prices that particularly drove January’s numbers high, can explain February’s high month-on-month tally as it contributed to a high base effect for February. Sizeable decline in prices of fresh fruits and vegetables during the previous month evidently masked the increase in prices of other products such as wheat products, rice, onions, etc.
Minimal changes were also seen in the housing, water, gas and electricity index, which increased only marginally on a month-on-month basis.
A slight decrease in prices of fuel during the month under review also meant that the transport sub-index did not contribute towards a rise in CPI figures either, though a rise in fuel prices in March will result in an increase for the next CPI reading. Even the NFNE and trimmed core figures decreased relative to the previous month. Yet, both the numbers are still more than nine percent.
Overall, for the first eight months of this fiscal year, the net CPI figure stayed at 8.16 percent, comfortably below the yearly target of 9.5 percent set by the SBP.
Having said that, mellowed CPI readings are not likely to have much relevance for the coming few monetary policy decisions because of the much greater concerns arising from the external side, consequent pressure on the rupee, rising debt levels and resilient government borrowing.
In fact, the SBP warned of resurging inflationary pressures in its last monetary policy statement, citing ‘high growth in monetary aggregates’ as a major risk. Therefore, while the yearly target of 9.5 percent for FY13 will likely be met, medium-term pressures continue to be high. Hence, a cut in DR still seems farfetched for the upcoming monetary policy.

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Major CPI groups - Feb 2013

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                                          Y/Y chg (%)        M/M chg (%)

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CPI general                                     7.38               -0.34

Food & non-alcoholic beverages                  6.90               -1.43

Non-perishable Food                             8.97               -0.74

Perishable Food                                -5.83               -6.11

Housing, water, elec, gas & other fuels         3.52                0.04

Transport                                       7.64                0.86

NFNE                                            9.60                0.40

Core Trimmed                                    9.20                0.20

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Source: PBS

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