Inflation monster is not coming in control. The fiscal year started on a high inflationary note. The headline number stood at 28.3 percent, although at 6 months low, still significantly higher than the consensus forecast of 26.8 percent. The monthly increase is recorded at 3.5 percent and that has increased the base and its impact is going to last for 12 months. And the increase of petroleum prices by Rs20 per liter yesterday is yet to be reflected in the inflation numbers.
The biggest monthly increase is in the housing and utility sub-sector where the sub-index is up by 8 percent on a monthly basis and contributed1.5 percent in the monthly increase (43 percent). The primary reason for the increase is electricity prices which are up by a whopping40 percent in a month due to recent revision in the base tariffs. Here, the increase is higher than analysts’ expectations. The other element is the quarterly house rent revision which is in line with expectations.
The other noticeable increase is in food inflation. It’s up by 39.5 percent and the monthly increase is at 4.1 percent. The worrisome fact is that non-perishable food items are up by 3.9 percent, as the prices are catching up due to the recent uptick in the international grain prices, and the impact is likely to sustain. Meanwhile, the perishable food prices noted an even higher increase at 5.6 percent on monthly basis.
Interestingly, food prices monthly increase is higher in the urban areas at 4.3 percent as compared to 3.8 percent increase in the rural segment. This contrasts with the price behavior for the last many years. The higher monthly increase is in perishable items – in urban areas, fresh vegetables increased by 37.6 percent and tomatoes by 34.5 percent. These prices can reverse back in the coming months, as fresh fruit prices are down by 17.9 percent on a monthly basis in July.
However, the increase in non-perishable items is stickier. The notable increase is in wheat flour, sugar and wheat at 13.3 percent, 11.8 percent and 11.1 percent respectively on monthly basis. Then milk fresh, milk products and milk powder prices increased between 2.5 to 5.5 percent in the last month and because of the high weightage of milk it has caused decent contribution in the CPI increase.
Then the increases in electricity and food prices have an impact on inflation in restaurants and hotels where the monthly increase is 1.7 percent and the yearly inflation at 34.7 percent in July. Another notable increase is in health index – up by 2.2 percent monthly and 21.5 percent on yearly basis, and in furnishing and household equipment where the increase is 1.7 percent (monthly) and 41.7 percent (yearly).
The only item where the monthly decline is transport – down by 0.2 percent on a monthly basis and up by 13.6 percent year on year. Here, the recent increase in petroleum prices is to be one of the major increases next month. Prices are up by around 8-9 percent and based on the international prices of petroleum products another 3-5 percent increase cannot be ruled out in the middle of August. Thus, this keeps the monthly increase in August higher, and its second-round impact will be in play in subsequent months.
Therefore, SBP’s primary challenge remains to tame inflation. The central bank expects inflation to be at 20-22 percent in FY24 and based on that forecast it has kept the policy rate unchanged at 22 percent. The key is to watch the global commodity prices – oil and grain, where any uptick can result in SBP altering its forecast upward.
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