CPI inflation stands below target at 4.16%

Low prices of oil and commodities in international markets among reasons for low rate

ISLAMABAD: Inflation in the last fiscal year clocked-in at 4.16%, remaining significantly below the official target, reported the Pakistan Bureau of Statistics (PBS) on Monday, amid concerns that the pace of increase in prices may accelerate in coming months due to global and domestic factors.

The Consumer Price Index (CPI)-based inflation target for the fiscal year 2016-17 that ended on Friday was 6%. The 4.16% annual average inflation rate was significantly higher than the rate in the preceding year but still in the range that economists describe as good for developing countries such as Pakistan.



The average inflation rate is slightly below the International Monetary Fund’s (IMF) expectations of 4.3%. Inflation is the only macroeconomic indicator where the government’s performance remained on track. One of the reasons behind lower than targeted inflation rate was low prices of oil and commodities in the international markets.

During fiscal year 2016-17, low oil and commodity prices, stable rupee, smooth supply of commodities and monitoring of prices at both federal and provincial levels were the major reasons behind contained inflation, claimed the finance ministry in the Economic Survey of Pakistan.

However, both the commodity prices and rupee are likely to come under pressure due to worsening of external sector indicators. Pakistan closed the last fiscal year (2016-17) at current account deficit that is more than double the official target of $4.5 billion.

Although the government has somehow managed the exchange rate, it will now come under increasing pressure to let the rupee gain its real value, currently estimated at over Rs116 to a dollar by the IMF and independent economists. A depreciating rupee will fuel inflation, although this will be good for supporting falling exports.

“The uptick in inflation is due to global revival of international commodity and oil prices, along with rise in domestic demand due to pick up of economic activities.

“In June, the pace of inflation slowed down to 3.9%, which was even lower than market expectations. The decline occurred due to limited uptick in food prices, reduction in fuel prices in the last month and decline in cigarette prices,” according to AKD Securities.

However, there are also concerns that the PBS methodology to calculate inflation is outdated. The PBS is not fully capturing the price levels. The CPI indicator captures prices of 481 commodities every month in the urban centres.

For fiscal year 2017-18, the government has again set the inflation target at 6% while the IMF has projected 5% inflation in the new fiscal year.

On a year-on-year basis, the non-food non-energy inflation, commonly known as core inflation, also remained at May’s level of 5.5% in June, according to the PBS. Among 89 commodity groups of CPI, the core inflation covers the price movement of 43 items.

The State Bank of Pakistan uses core inflation while formulating its monetary policy. The effect of monetary policy on prices is reflected on core inflation with lag effect; making it a good predictor of future CPI inflation.

The gradual build-up of domestic demand is evident in rising core inflation to 5.5%.

Going forward, increasing oil and commodity prices remain a concern, according to the finance ministry. It added that the global commodity and oil prices were expected to move in upward direction, which will affect domestic inflation.



However, given the increase in agriculture production and sufficient food supplies, stable exchange rate, effective monetary policy, inflation is expected to remain below the target.

Published in The Express Tribune, July 4^th, 2017.

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