Consumers expect higher inflation in future

SBP-IBA Consumer Confidence Index registers 1.6% increase over two months

KARACHI: Consumers expect inflation to inch up in coming months, according to a survey jointly conducted by the State Bank of Pakistan (SBP) and the Institute of Business Administration (IBA), Karachi.

The November edition of the bi-monthly SBP-IBA Consumer Confidence Index (CCI) shows a “marginal increase” of 1.6% over the preceding survey undertaken in September.

CCI clocked up at 168 points in November, up 2.65 points from the CCI reading of 165.4 points in September.

An upward movement in the CCI shows improvement in the inflation expectation while a downward trend shows otherwise.

The September edition showed consumers expected low inflation going ahead, but the latest edition shows the consumers’ expectations are to the contrary now. This reflects that the expectation of low inflation is finally bottoming out among consumers.

The survey covers three broad themes: overall consumer confidence indices, inflationary expectations and other key highlights about households’ perception of important indicators.

The survey uses the CCI to measure households’ perceptions about the economy. The CCI can be partitioned into current and expected economic conditions indices. The former, denoted by the Current Economic Conditions (CEC), recorded an increase of 4.12% from the September survey. The latter category, denoted by the Expected Economic Conditions (EEC), recorded a small decline of 0.9% relative to the preceding survey.

The survey reveals that the overall inflation expectations recorded a small increase relative to the last survey. This is explained by marginally higher expectations of prices in the next six months of food and energy items. However, price expectations of non-food and non-energy items continue on their declining trajectory.

It is important to note that the expectations about inflation actually play the most significant role in determining the overall price level in an economy. Economists believe prices go up partly because people expect them to rise.

Year-on-year inflation, measured by the Consumer Price Index (CPI), was 1.6% in October as opposed to 1.32% in the preceding month. CPI inflation has averaged at 1.65% in July-October as opposed to 7.1% in the same period last year. The CPI for 2014-15 clocked up at 4.56%, which is notably lower than the average inflation of 8.63% recorded in 2013-14.

Low inflation reinforced consumers’ expectations of lower-than-usual inflation following September 2014 amidst falling global oil prices. According to the SBP, the headline inflation is expected to reverse its declining momentum going forward, even though the average inflation is likely to remain below the 2015-16 annual target of 6%.

Published in The Express Tribune, December 1^st,  2015.

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