With decline in oil prices, consumers expect low inflation

January edition shows improvement in households’ perception about state of economy

KARACHI:

Thanks to a decline in oil prices, Pakistani consumers expect low inflation 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 January edition of the bi-monthly SBP-IBA Consumer Confidence Index (CCI) shows an increase of 2.63% over the preceding survey undertaken in November 2015.



CCI clocked up at 172.47 points in the latest survey, up 4.42 points from the CCI reading of 168.05 points in November.

An upward movement in the CCI shows improvement in the households’ perceptions about the state of the economy while a downward trend shows otherwise. Households’ perceptions, which are relative to six months in the past and six months in the future, are about personal financial conditions, the overall economy, unemployment and consumption of durable goods.

The November edition showed consumers expected an uptick in inflation going ahead, but the latest edition shows the consumers’ expectations are to the contrary now.

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

The CCI can be partitioned into current and expected economic conditions indices. The former, denoted by the Current Economic Conditions (CEC), registered an increase of 1.73% from the November 2015 survey. Similarly the latter index, which is denoted by EEC, recorded an increase of 3.56% relative to the preceding survey.



The survey reveals that the overall inflation expectations recorded “a significant decline” relative to the last survey. Similarly, the low inflation expectations are evident for all the commodity groups, food, energy, and nonfood non-energy items.

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

Year-on-year inflation, measured by the Consumer Price Index (CPI), was 3.32% in January as opposed to 3.88% in the same month of 2015. CPI inflation has averaged at 2.26% in July-January as opposed to 5.77% in the same period last year.

According to Shajar Capital, essential elements characterising the suppressed inflationary readings include the fall in petroleum and food prices in addition to the reduction in the government’s budgetary borrowings from the central bank.

The SBP expects the average inflation in 2015-16 to remain in the range of 3%-4% mainly because of a benign outlook of global commodity prices, expectation of a moderate pickup in domestic demand and further ease in supply-side constraints such as energy shortages.



According to the SBP, the trend in inflation is finally reversing, as the declining movement of the CPI has stopped. In fact, the year-on-year CPI has gone up a little for the last four months.

The SBP-IBA team conducts a stratified random telephone survey of more than 1,750 households across Pakistan every two months. Of these, 66% households were fresh interviewees while about 33% households were interviewed in the previous edition as well.

Published in The Express Tribune, February 10^th, 2016.

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