All eyes are generally focused on the much talked about CPI, when inflation is being talked about. There is good reason for that, as that is more representative of the price impact the consumer faces, and that then gets very important weightage when the monetary policy decisions are being taken. Now, with the rebased and much improvised inflation computation methodology – there is national, urban and rural inflation in the mix. Pick whichever you want (and twist it as per our political inclination). What gets largely overlooked is the Whole Price Index (WPI), despite being a much sharper leading indicator of general CPI.
Last month, the WPI crossed 15.6 percent, which was the highest reading in at least a decade. A more sophisticated analysis with all statistical tools may deliver a sharper picture, but even a cursory look at WPI numbers back in July 2019, had given enough indications that things were heating up and that the 1QFY20 CPI would be well in double digits (see: WPI heating up; published July 18, 2019).
Also interestingly, the rebased WPI numbers offer a much higher reading than the previous methodology. The 12-month average WPI as per new base comes at 15.2 percent, versus 12.9 percent as per the 2007-08 base. All of it seems to be a result of altered computation methodology, as the weights assigned to all categories have virtually remained the same across two bases. It essentially comes down to assigning more representative weights to cities, instead of the previously used practice of equal weights to all cities, irrespective of the size.
Now back to WPI numbers. The 1QFY20 was the most significant in terms of impact caused by the gas & electricity sub-index with a 12 percent weight in the WPI basket. The gas prices were revised in July 2019, and the impact was more pronounced as the October 2018 revision was still in play. And from July 2019 onwards, the PBS somehow decided to compute increase in electricity price for WPI purposed, having recorded negative changes since January 2019, despite a considerable increase in commercial electricity tariffs.
Gas price impact has considerably slowed after October 2019, but this may well be short-lived, as January 2020 is likely to see another round of gas and electricity price revision. The IMF programme will not allow many let-offs or delays in periodic tariff adjustments. The respite, will have to come via food index, as even the fuel index would continue to be on the higher side, now that the government intends to keep the taxes on petroleum considerably higher.
The impact on CPI usually comes with a lag. Those looking for single digit inflation for the rest of the fiscal year, may be in for a disappointment. The SBP may clearly want to wait and see the inflation trends for a few more months, before monetary easing comes into play.