The downward journey of inflation continues, as it is recorded at 4.1 percent in December 2024 – the lowest reading since March 2018. The high base effect is very much in play. The food prices are up only by 0.3 percent YoY – and the rural food index reading is in fact less than the same month last year.
1HFY25, headline inflation averaged 7.2 percent as compared to 28.8 percent in the same period last year. The inflation decline in the 1HFY25 is not merely attributed to the high base effect, as the average month-on-month increase in the last six months stood at 0.6 percent versus 1.8 percent in the same period last year. Thus, the decline in the monthly increase is three times versus the yearly increase fall of four times.
This is a remarkable decline mainly driven by the food prices – which are down to global commodity prices cyclical fall, stable currency, and absence of wheat support price. The wheat prices alone are down by one-third in the last twelve months and that helps to arrest the inflation of many other food commodities which are directly or indirectly linked to it.
The Government administrative control is in play when the government crackdown on the poultry and pulses sector where prices were not falling in tandem with the global prices and other domestic factors. These two items on a month-on-month basis are down by 13 percent and 7 percent respectively and the finance minister, who is generally a proponent of private sector independence, takes pride in this administrative control.
The monetary tightening in FY24 has a role to play in it. It has helped to arrest the demand, which was falling invariably due to eroding purchasing power owing to near hyperinflation in the previous two years, and in rural communities, it’s a double whammy, where real farm income eroded due to the absence of wheat support prices.
Having said that, the second-round impact of overly high inflation in the last two years is still in play in a few sectors, as the year-on-year increase is in double digits in some sectors. Clothing and footwear prices are up by 14.4 percent while the increase in the health index is 13.3 percent. Communication and education are not falling behind as the sub-indices increased by 12.2 percent and 10.3 percent while the hike in miscellaneous items is at 12.1 percent.
Together in all these sectors, the combined weight is 22.3 percent whose increase is outweighed by heavyweight food (34.5%) and Housing and utility (23.4%) sectors where the yearly increase in December stood at 0.3 percent and 3.4 percent respectively.
The decline in the food price index is explained above. In the case of housing and utilities, the downward trajectory is in the global oil prices and stable currency at home is in play. Although the demand for energy is in the fall, it has no or little impact on pricing, as these items have administrative prices.
The story is similar in the transportation sector where the yearly decline is at 2.5 percent mainly due to falling international petroleum prices. This at a time of slight currency appreciation led to the fall of fuel prices at 6.6 percent.
The question is about the outlook for inflation and its impact on the interest rates which are already down by 900 bps from the peak in just six months. Well, this decline will generate some demand – usually the impact will be seen with a lag of 6-18 months and may have some upward pressure on inflation. Then the impact of a high base is going to dilute, as inflation may hover around 8-10 percent in the April to June quarter.
SBP should take notice of these and check the monetary easing going forward. It should not give too much heed to the finance minister and deputy prime minister who wish to get the interest rates in single digits. The central bank should exercise its independence and focus on keeping inflation in the band of 5-7 percent.
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