Consumer Price Index: Inflation increases 3.2%, faster pace in offing

Increase in regulatory duty, 1% additional customs duty on imports reasons for surge

ISLAMABAD:

The key inflation indicator increased for the third successive month, amounting to 3.2% last month, as the mini-budget introduced in December equally affected food and non-food items.

Inflation measured by Consumer Price Index (CPI) - the indicator that captures prices of 481 commodities every month in the urban centres - rose to 3.2% in December on a year-on-year basis, said the national data-collecting agency on Friday.



Although the index remained in the safe zone, it was the third consecutive month when CPI-based inflation rose after slipping to over a 13-year low. The pick in the pace of inflation was in line with the projections made by the State Bank of Pakistan in its belated annual report of 2015.

The central bank reported that a possible hike in electricity and gas tariffs by the government may pose up-side risks to the inflationary outlook. The government has already announced a significant increase in the gas tariff. The implications of the Rs40-billion mini-budget were also felt on daily usable items.

For the second consecutive time, non-food non-energy inflation; commonly known as core inflation further increased to 4.1% in December over the same month of the previous year, according to the PBS.

Core inflation had been recorded at 3.6% in October and has been increasing since, indicating that an underlying inflationary pressure has started building up.





The main reason behind the surge in inflation was the government’s decision to increase regulatory duty rates on 350 items besides imposing additional 1% custom duty on thousands of imported items. Importers have started passing on the impact of taxes to consumers.

However, due to an overall slump in commodity prices inflation would remain within reasonable limits and below the official target of 6%.

The central bank also noted that the likely ease in domestic petroleum prices would further soften inflation expectations of households and a stable rupee against US dollar would positively influence expectation of businesses.

The SBP ruled out the possibility of deflation in Pakistan, saying the recent increase in power tariffs, recovery of Gas Infrastructure Development Cess (GIDC), stable rupee against major trading partners and lower reduction in fuel prices compared to the last year would help reduce deflationary risks.

In an anticipation of increase in prices, the SBP kept the key policy rate - the rate at which it lends to commercial banks - unchanged at 6% in its last monetary policy announcement.



According to the PBS, prices of food and non-alcoholic beverage group increased to 1.5% in December over a year ago. The food group has over one-third weight in CPI basket and any change in price trends has an effect on the overall prices.

The perishable food items prices increased 2.8% year-on-year basis in December while non-perishable food items group saw an increase of about 1.2%, according to the PBS.

Onion prices jumped over 112% in December, followed by 56% increase in gram pulse. Cigarettes prices increased 25.7% due to increased taxation.

There was also an upward trend in prices of garments, tailoring and education, according to the PBS.

Contrary to the upward adjustment in CPI-based inflation, the Wholesale Price Index (WPI) again remained negative. The WPI-based rate of inflation contracted 2.4% in December over the same month of the previous year, said the PBS.

Average CPI-based inflation rate in July-December period also slightly picked to 2.1%, said the PBS. It will not affect the overall inflation target of 6%.

Published in The Express Tribune, January 2^nd, 2016.

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