FY16: Average inflation clocks in lower than expected at 2.86%

Inflation target for fiscal year 2015-16 was set at 6%

ISLAMABAD: The average rate of inflation in the last fiscal year remained far below the annual target and clocked in at 2.86%, reported the Pakistan Bureau of Statistics (PBS) on Friday amid calls to review the price calculation methodology, which is not fully reflecting prevailing market rates.

The Consumer Price Index (CPI)-based inflation target for fiscal year 2015-16 that ended on Thursday was 6%. The 2.86% annual average inflation rate was also lower than the International Monetary Fund’s 4.7% projection for the last fiscal year.



There was a surge in price of food items last month due to increase in demand during Ramazan. However, the spike did not affect the overall CPI for the month of June, highlighting a flawed methodology.

In June, the year-on-year inflation remained at previous month’s level of 3.2%, according to the PBS.

The heavy indirect taxation and absence of magistracy powers to check prices of essential items was causing surge in prices. However, the PBS was not fully capturing the price levels.



The Ministry of Finance claimed in the 2015-16 Economic Survey of Pakistan “prudent fiscal and monetary policies, stability in Pak rupee and smooth supply of commodities helped in moderating the headline inflation and other inflationary indicators. It also said that monitoring of prices both at the federal and provincial level along with fall in global commodity prices also anchored the inflation.

“The lack of domestic demand and reduction in global oil prices helped restrict the inflation below 3%,” said Dr Ashfaque Hasan Khan, former Economic Advisor to Ministry of Finance. He said that the low inflation was a global phenomenon and many advanced countries were now planning tax expansionary measures to avoid to risk of deflation.



The CPI indicator captures prices of 481 commodities every month in the urban centres.

Analyst’s reaction

A study carried out by renowned economist Dr Hafiz Pasha and his team from the platform of Policy Research Institute of Market Economy (PRMIE) confirmed the deep-seated apprehensions that the PBS was understating the level of inflation in the country.

PRIME findings, released last month, showed that the price level of CPI for all urban households in February 2016 was understated as much as 9%. It added the price level for the lowest quintile of households was 13% higher than the overall CPI in February 2016. Furthermore, the poor households have faced an annual inflation rate since 2007-08, which was almost two percentage points higher than the overall CPI reported by PBS. Other households have been exposed to 1.5 percentage points more inflation on average annually than that reported by PBS.

It has recommended that the there was a need for more inflation indices to be constructed to fully portray the taxonomy of inflation in Pakistan. The PRIME report showed that there appeared to be a serious problem of understatement of inflation in housing rents.

Last month, Finance Minister Ishaq Dar had announced that he was ready to invite international experts for reviewing the statistics compiled by the PBS. He has not yet fulfilled his promise.



For the next fiscal year 2016-17, the government has set the inflation target at 6% while the International Monetary Fund has projected 5% inflation in the next fiscal year.

The non-food non-energy inflation, commonly known as core inflation, also remained at May’s level of 4.6%, according to the PBS.

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

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