CPI: well in control

Smoke up; decline in tobacco prices has kept headline inflation subdued which is complemented by high base of perishable food items. Together, these two have nullified the impact of quarterly upward revision of house rent index. The CPI stood at 2.9 percent in July17, while on monthly basis; it was recorded at 0.34 percent. The fiscal year has started on a good note.

Seeing the recent trend in SPI, WPI, and international oil prices, headline inflation is likely to remain suppressed in the months to come. Lower food and oil prices have subdued inflationary expectations, although political uncertainties amid rising current account deficit are keeping chances of currency depreciation alive.

Nonetheless, food, tobacco and beverages prices are keeping inflation low. In case of tobacco, the government finally halted the practice of increasing excise duty in this year budget, and has given incentive for low price cigarettes to compete with illicit market.

The players pounced upon the opportunity and are giving discounts - cigarette prices are down by 5.6 percent in one month and the fall is 16.1 percent on yearly basis.

The food price index though increased by 0.35 percent on monthly basis, decline in previous few months has made the base favourable, as on yearly basis, food index increased by a mere 0.7 percent in July. Items such as tomatoes, pulses and sugar are down in range of 15-45 percent on yearly basis.

Food inflation is likely to remain low in August as the SPI for the last two weeks of July which is to be registered in August inflation remains in negative territory. WPI is showing some decline as well - down by 0.24 percent on monthly basis while the increase is restricted to 0.66 percent on yearly basis in July. This is implying the prices are likely to hover in lower range in the coming few months.

The international trends are no different; as global commodity prices index is keeping inflation low. That is why despite the fact that house rent index increased by 1.5 percent in July and 7.2 percent on yearly basis, headline inflation is likely to be negative on monthly basis next month.

Core inflation is under pressure as it increased by 5.6 percent in July while the monthly increase is double of headline at 0.7 percent. The house rent index, health and education inflation are primarily responsible for high core inflation. This is also implying that inflationary expectations are somehow alive and easing monetary policy coupled with expansionary fiscal policy close to elections is having its toll on non-food non-energy prices.

Bottom line is that till the time currency peg to USD is intact, imported inflation would not come and given suppressed commodity prices, inflation will remain well within the SBP’s target of 4.5-5.5 percent, and much below the budgeted target of 6 percent in FY18.

Had the external account pressure not been so pronounced, doves would have dominated seeing the encouraging inflationary trend.