CPI tamed and in control

The CPI tamed down once again to subside the fears of immediate inflationary pressure. On monthly basis, the headline number is down by 0.7 percent in December; biggest fall in 22 months. That has brought the yearly number down to 3.7 percent, with year to date average at 3.9 percent.

Perishable food prices nosedived to arrest the rising trend in CPI. The food sub index is down by 2.3 percent over the prices in November while perishable items fell by 11.6 percent. The prices started falling in November as earlier seasonal demand was higher, which is not the case now.

Prices of food items such as potatoes, fresh vegetables, sugar, and chicken declined significantly to drag headline numbers into negative. However, the trend in non perishable items is upward as the sub index increased by 0.6 percent over November, but the favourable base effect has curtailed the yearly increase to 2.3 percent.

The weight of food index is too high to anchor the headline numbers. While the second largest contributor to the index is housing, water, electricity and gas which virtually remained unchanged in December. Within it, housing has highest weight and its surveyed after every three months and it will have its toll in January.

On monthly basis, the transport index saw the biggest jump; and that trend may continue as oil prices have started to move north and government is slowly passing the impact, especially for HSD. However, the fall in the past many months has not let the yearly number look ugly at all - the sub index fell by 3.2 percent on yearly basis.

CPI in second half is likely to hover around 4-5 percent and the full year average should be around 4-4.5 percent. Yes, the numbers are revising - the governments target is 6 percent, while the SBP expects inflation to remain between 4-5 percent.

December number has changed the equation a little bit; the chances of any raise in policy rate in upcoming three reviews in the fiscal year are thinning; and likely outcome would be status quo. The need is to have a closer look at core inflation, which is north of 5 percent. It declined marginally to 5.2 percent in December from 5.3 percent in November.

It's still comfortable against the SBP's policy rate of 5.75 percent as the real interest rates are in positive territory, whatever lens you use to evaluate. The 12 month moving averages of both CPI and core inflation after bottoming out in 3QFY16, and are clearly on a northward journey (see graph).

Any reversal in oil prices or any depreciation in PKR can suddenly increase inflationary expectations. The doctors order is to keep a cautious monetary stance.