CPI still in safe waters

Another star on PML-Ns flag is that of inflation settling well below the budgeted target. Lady luck is with the government as due to depressed global commodity prices, headline inflation clocked in at 4.5 percent in FY15 - its lowest level in 11 years.
When the year started, inflation was expected at around 7-8 percent. But an unexpected fall in oil prices and the other commodities changed the outlook all together. In January, a few economists were anticipating the full year inflation to come down to as low as 2-3 percent. The picture didn get as rosy as it could have had the oil prices remained at their bottom.
Now with prices bouncing back a bit, the inflation on monthly basis started inching up in the last quarter of the fiscal year. Prior to November (prior to steep fall in commodity prices) average monthly inflation was 0.65 percent and in the best days of November-March average monthly inflation was negative 0.43 percent. Since then it has started heading north again with April-June monthly inflation averaging at 0.9 percent.
The uptick in monthly inflation has not yet adversely affected the yearly number as the fall in preceding quarters has made the base effect too low to restrict headline numbers. That is why despite the monthly inflation of 1.32 percent in April (second highest of the year), the yearly number at 2.11 percent was the lowest in that very month.
So the base effect keeps on playing its role as with uptick in prices of 0.62 percent in June over May, the year-on-year inflation was limited at 3.16 percent - it was the same in May. The low base affect will keep on supporting the headline numbers till November as yearly inflation will comfortably fall between 2-4 percent till that time. The challenge will come post-November when the base affect will be reversed and inflation may start jumping significantly unless the commodity prices dip again.
Anyway, inflation is likely to remain at lower levels and well in single digits in FY16. The policy makers can be expected to maintain a dovish monetary stance and may ease the policy rate further to induce private sector credit off-take. The core inflation has come down significantly to augment the case of easing monetary policy. Non-food, non-energy inflation index was at 8.3 percent in the start of the year and now its down to 4.6 percent in June while the yearly average stands at 6.6 percent. Similar, is the story for trimmed core that came down from 7.1 percent in start of the year to full year average of 5.2 percent.
All of this calls for further easing in the monetary policy with policy rate currently at seven percent and target policy rate at 6.5 percent. But some caution is still warranted as post-November inflation may start moving in northward direction.

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June - 2015 CPI - Key items

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                             YoY (%)     MoM (%)

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General                       3.16          0.62

Food & bev                    2.41          0.60

Non-persishable               2.45          1.11

Perishable                    2.17         -2.16

Clothing & footwear           5.60          0.45

"Housing, water,

electricty, gas & fuels"      4.85          0.01

Transport                    -6.54          1.00

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