CPIs slide - the mystery goes on

When the CPI numbers for March 2013 were released by the Pakistan Bureau of Statistics (PBS), the significantly low month-on-month figure did not surprise analysts. But the anomaly of decreasing NFNE and core trimmed inflation figures, despite rising government borrowing over the past few months, continues to be a mystery.
To start off, a high base effect from March 2012 resulted in the year-on-year tally being brought down significantly to 6.6 percent in March, a record low for the rebased CPI figures available since July 2009.
But the month-on-month picture wasn as rosy with the previous months decrease reversed in March, resulting in an increase of 0.41 percent over the previous month. One needs look no further than the SPI figures over the past few weeks to understand this MoM increase, which had been showing a week-over-week increase since the beginning of March.
Non-perishable food commodities - making up nearly 30 percent of the CPI basket - saw a decrease in prices of roughly 0.4 percent in March 2013 vis-à-vis the previous month. Reduced prices of lentils, pulses and flour were responsible for this decrease.
However, prices of perishable food items increased significantly by more than seven percent, thanks to dearer fruits and vegetables, such as onions and tomatoes. Plausibly, the arrival of seasonal fruits explains the rise in prices of these perishable items.
In fact, the last few SPI readings of the latter half of March, which will be taken into account for calculating the CPI figure for April, have also shown a steady rise, with the latest one depicting a 0.5 percent week-on-week increase. Considering that SPI is largely representative of food prices, which have the highest weight in the CPI basket, another MoM increase for April seems to be in order.
The other major sub-index of housing, water, electricity, gas and fuel witnessed only a slight month-on-month increase, led by higher prices of construction material. Transport, similarly did not offer much gains relative to February, considering that fuel prices slid down a tad in the month under review compared to the previous month.
The year-to-date CPI came to about 8.3 percent for 9MFY13 against 10.8 percent for 9MFY12, paving the way for a relatively mild full year figure for FY13, conveniently below SBPs target of 9.5 percent. But economists believe the CPI numbers to have been distorted to give a picture further from the truth.
"The year-on-year decrease in gas prices has been depicted as 46 percent in the latest CPI figures. This is the realised impact of an adjustment in gas prices because of certain gas slabs being merged. But that doesn mean gas prices have decreased. The year-on-year decrease shown is distortionary," said senior economist Dr Ashfaque Hasan Khan.
Economists were also puzzled by the declining NFNE and core trimmed numbers, considering government borrowing has been on the rise.
"Decelerating, but still positive, inflationary trends in other CPI indices, such as housing, furnishing, education, etc. may explain the declining rise in NFNE and core trimmed inflation. But with increasing government borrowing, the decline does seem a little mysterious. Plausibly, the impact of government borrowing on core inflation numbers will become more evident in the longer term, and the current decrease is more an anomaly," said another seasoned economist on conditions of anonymity.
Therefore, its not surprising that the lower CPI numbers won budge SBP in most likelihood, thanks to other external risks from the balance of payments and a weak rupee-dollar exchange rate that raises concerns about imported inflation. The SBP is also cognizant of rapidly depleting reserves, making the possibility of returning to the IMF even more imminent. Therefore, a rate cut in the upcoming monetary policy this month doesn seem to be on the cards.
Going forward, FY14 may not enjoy the same southward CPI journey that FY13 persistently depicted. Weakening rupee-dollar exchange rate and a possible increase in international oil prices (because of the US showing signs of economic recovery) that will spill over on power tariffs, fuel prices and other CPI heads would keep a check on any decrease in FY14s CPI numbers.