The inflation is clocking up as the food prices move up the hill; while the northward direction of oil prices is building up inflationary expectations. The CPI for April at 4.2 percent (Mar16: 3.9%) not only beats the analysts expectations, but is also the highest yearly recording since December 2014. The 1.55 percent change on monthly basis is a 21-month high. Had the base affect not been in favour of low inflation, CPI would have been even higher.

The perishable food items are the main culprit as prices of items like tomatoes, chicken, fresh vegetables and fruits soared. Prices may go further up as Ramadan is fast approaching as traders are seemingly busy in hoarding items to book capital gains at the onset of holy month. The administration (especially Punjab) will be busy allocating virtually all the provincial secretaries and commissioners to regulate prices.

Prices of essential items have cooled down in the past two weeks, according to the SPI data, which suggests the monthly inflation number would not be too high in May, especially for the food group which is the main culprit in Aprils CPI.

The other reason for high monthly inflation in April is 0.86 percent up tick in housing, water, electricity, gas and fuels sub index. It is due to the quarterly revision in house rent index which clogged up at 1.22 percent and it will remain zero in May and June. Hence, with no increase in house rent index and short term correction in food items, lower recording of CPI in May seems likely. Inflation is expected to remain below 4 percent both for May and June, and full year average inflation may remain hover around 2.8-3 percent.

The core inflation at 4.4 percent is still below last months peak of 4.7 percent, while trimmed core at 3.8 percent is same as previous month. The number would remain stable in the short term as the government is not keen on passing the buck of rising oil prices to the consumers. With the IMF programme at its tail end; the pressure is on the PMLN government to sway away from populist decision has eased a bit. And the authorities are trying to calm down the accountability pressures in the aftermath of Panama Leaks, by taking populous but economically unhealthy decisions.

All said the low base affect will most likely keep the headline inflation below 5 percent for rest of the calendar year. However, after that the numbers would start heading north. And the way oil prices are behaving, they are likely to be higher by that time. This would add further pressure on inflation. The likely expansionary fiscal policy in FY17 will be of little to no help in taming inflation. What if the currency bubble shows signs of busting? Surely, that will build inflationary expectation. The demand driven factors of easing monetary policy are already visible. Hence, a prudent response from the SBP could be to revert to tightening monetary policy soon.