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There is no respite to the inflation dragon. Food prices are not coming in control. Global commodity prices upward shift will keep the prices higher in the domestic market. Headline inflation stood at 11.1 percent in April with 1.0 percent increase over the previous month. 10MFY21 average is standing at 8.6 percent – full year inflation is likely to be at 9 percent. CPI core is at 7 percent in April. Trimmed core is at 9.8 percent. Inflation is hitting harder on poor as sensitive price index (SPI) is at whopping 21.3 percent. The expected inflation is likely to remain intact as wholesale price index (WPI) is at its 10-years high of 16.6 percent.

The headline (CPI) 12M moving average is taking a U-turn. It was on downhill since the start of 2020- came down from 11.7 percent in Feb20 to 8.4 percent in March21. In April21, it inched up to 8.9 percent. It is likely to remain above 9 percent for the next few months before coming down.

Seeing inflation numbers, hawks in the monetary policy committee should be flexing muscles. However, the COVID third wave is calling for easing. The new FM who grew up as a consumer banker thinks that low interest rates is the recipe for high growth. Blending all these, the likely outcome is status quo in the upcoming monetary policy announcement expected in the third week of May.

The double-digit inflation in April was expected due to low base in the last April. This low base impact of last year will keep headline number high till June before coming down to back to single digit. Food prices increase is not helping the cause. In April, food inflation is more hurting to urban dwellers. That is a usual cycle as in the holy month, the prices of fruits and all have historically remained higher.

Food prices are up by 2.2 percent MoM and 15.9 percent on yearly basis. The urban food (15.7%) is higher than the rural food (14.1%) for a change. A few months back rural food inflation was 3 percentage points higher than urban. Food prices in Ramzan are higher – fruit prices are up by 25.2 percent in just a month and the increase is similar for rural. Not to mention that tomatoes inflation is back – up by 67 percent on a month in urban centers and 55 percent in rural areas.

In April, the quarterly house rent index is recorded as well. Housing and utilities sub index is up by 0.7 percent (MoM) and 9.3 percent on yearly basis. It has highest weight in core and is implying that the core is likely to remain up. House rent alone is up by 1.6 percent in the last quarter and 6.2 percent in the last 12 months – the increase is higher in urban relative to rural. That is one reason for bringing rural and urban headline inflation almost at the same level – 11 percent and 11.1 percent, respectively. Five months back rural headline inflation was 4 percentage points higher than urban.

The growing urban inflation is depicting that demand and wage pressures are slightly building up. In non-food items, tailoring prices are up by 4.5 percent MoM in urban areas while the increase is 2.0 percent in rural settings. This could be the Eid affect as people tend to stich new clothes for festivity.

The global inflationary pressures are going to hit domestic prices soon as well. Overall global commodities prices are soaring due to global supply chain shortages. In the west (especially the US) vaccination process is swift and Fed fear inflationary pressures soon. There will be some spillover in Pakistan.

The wages at home are likely to move up next fiscal. Federal government kept wages growth in check in the past three years. This time the government is likely to increase wages. Provincial government will follow suit, and this would have an impact on private sector. The wage- price spiral – very closely seen by SBP - may come in action.

The government is trying to dilute the impact of global commodity prices by not passing on the impact of oil price increase on consumers. Against what is committed to the IMF, government may not further increase electricity tariff soon and may not impose new taxes in the upcoming budget. Despite all these, the inflation dragon is not coming in control. It is fast eroding PM IK’s popularity. The new FM success is hinged up on controlling prices. Let’s see how much the government can sail against the tide.


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