CREATIVE COMMONS
The annual inflation rate measured by the Consumer Price Index (CPI) - which captures prices of 481 commodities in urban centres - was registered at 3.7% in December compared to the same month of the previous year, reported the PBS.
The main reason behind the fall was reduction in prices of both perishable and non-perishable food items and transport fare. Due to the same reasons, the monthly inflation rate decelerated to negative 0.7% last month over November.
It was the second consecutive month that the pace of annual inflation slowed after increasing for five straight months.
Core inflation - measured by excluding energy and food items, which had started picking momentum also - slightly decelerated to 5.2% last month. It was for the first time in half a year that the rate of increase in core inflation was lower than the previous month, showed the PBS data.
In its November 2016 Monetary Policy announcement, the Monetary Policy Committee decided to maintain the policy rate at 5.75%, while beating expectations of increase in rates after surge in core inflation in previous months.
However, in previous months investors had gotten an impression from some of the central bank’s comments that the State Bank of Pakistan (SBP) may jack up its key policy rate - the rate at which it lends money to the commercial banks.
In an anticipation of increase in rates, commercial banks have stopped investing in the government’s long-term Pakistan Investment Bonds (PIBs), forcing the government to start relying on six-month market treasury bills to raise funds for budget financing.
On monthly basis, the prices of perishable food items dropped 2.26% while perishable food items rated decreased 0.6%. On an annual basis, there was only 2.43% increase in price of non-perishable food items.
The average inflation during the first half (July-December) of this fiscal year remained at 3.9%, according to the PBS. For fiscal year 2016-17, the government has set the inflation target at 6% while the IMF and SBP projections are below the target level.
“We expect average CPI inflation in fiscal year 2017 to remain lower than the target of 6% set by the government,” wrote the central bank in its first quarter report on the state of Pakistan’s economy. However, it said that the SBP would monitor global and regional developments closely to remain prudent in its monetary stance.
The quarterly report highlights two key developments for the purpose of inflation forecast. The SBP said that the government’s decision to end the 7-month long spell of stability in petrol prices in the country was one of two key determining factors. The federal government allowed an increase of Rs2 per liter, effective from 1st December 2016, although it again left the prices unchanged for first half of January.
The government’s decision to switch back to fortnightly price determination shows its intentions about passing on the impact of increase in petroleum products prices in the global market to the domestic consumers.
The central bank noted that on the global front, the OPEC was able to strike an agreement to cut crude production - for the first time in 8 years. Just the signal that this cartel - which controls over a third of the global crude - is alive, was enough to send jitters across the commodity market; price of Saudi Arabian Light oil increased by over 9%, right after the announcement, it added.
The SBP report stated that the impact on Pakistan’s CPI inflation will be influenced by when, and how much of the increase in global prices the government is willing to pass on to consumers.
Published in The Express Tribune, January 3rd, 2017.
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