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Inflation remains high but is not hitting everyone similarly. The divergence is intuitive, and the numbers are reflecting it. For example, urban non-food inflation is at 3.6 percent while the same for rural is at 17.7 percent. The poor who spend 40-50 percent on food are hurting badly. The realization is there at the top level; but governance failure at the delivery stage is showing a rather dismal positon. Then the inter provincial rifts are making things worse.

The CPI stood at 8.9 percent in Oct 20. The urban and rural inflation gap widened to 4 percent – highest ever since rural inflation is being recorded. The trend of food inflation seems to be peaking in terms of monthly increase. The perishable food items ought to reverse direction in Dec or Jan (based on historic trends). Future prices of sugar are at discount to spot prices due to better crop this year. Sugar prices may come down a bit in months to come unless something unexpected surfaces again.

Latest weekly SPI recording is showing an increase of 1.38 percent. Many analysts were expecting this to move down. But no one could see tomato prices moving up by a whopping 47 percent in just a week. Once the new tomato crop comes in, prices may reduce to one third. Similar thing happened last year too. Sugar prices have moved up by 4.2 percent in the last week. Once the new supply is in the market, sugar prices may fall.

The key is to look at wheat. wheat prices are hovering around Rs2,200-2,400 per 40kg bag. If the wheat support price for next year is fixed at Rs1,600, then retail prices may come down to Rs1,800-1,900 in due course of time. However, if the price is set at Rs2,000 or above, as being pressured by the Sindh government or some other parliamentarians, then prices may remain there or increase further. And this would have cascading impact on milk and food items too. The wage spiral impact would naturally follow. That is why not increasing wheat support price by too much is of utmost importance. The good sign is that prices are coming down - evident from the latest weekly data.

In October, the national CPI increased by 1.7 percent which is a little below analysts’ expectations as house rent quarterly recording (takes place every third month) was at 0.88 percent and the yearly increase at 4.7 percent. This, along with the decline of electricity prices by 2.3 percent on monthly basis kept the housing and utilities sub index at 2.7 percent. This has largely offset the increase in food prices.

Once food prices move south, the overall inflation may come down significantly. The key is how the energy tariffs are revised as the resolution of circular debt is one important factor pending the IMF review. Then there are pressures of IMF on the taxation side as the primary deficit target may remain elusive without reducing the tax exemptions or imposing new taxes. Given the political and social pressure of high food inflation, government may not revise these prices up.

Seeing last week’s tomato prices, the Nov CPI may continue the upward food inflation and the headline may be north of 8 percent. The key is to see the price reversal in food items in Dec or Jan onwards. If this happens, that may bring inflation down temporarily to below 8 percent in Jan. The full year inflation is still expected to remain in SBP’s forecasted range of 7-9 percent – and most likely closer to the higher end of the range. And till the time COVID is alive, the negative real interest rate regime may continue. But if the upward trend of food prices does not significantly reverse, hawks may get dominant in monetary policy.


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