While working out its monetary policy the central bank tends to use core inflation — a good predictor of future consumer price index — which is measured through the indices of 43 non-food and non-energy items. Petrol, diesel, CNG, electricity and natural gas as well as the food group are excluded from core inflation. This increase in core inflation and its impact on headline inflation will finally drive a nail or two through the era of low inflation, which until now allowed the government to increase the prices of petroleum products and gave the central bank the room it needed to print more than Rs1 trillion in currency notes.
Inflationary pressures have already made themselves apparent ahead of the implementation of budgetary measures. Several measures, including another huge increase in petroleum levy, are also likely to trigger inflation from the next fiscal year. Perhaps the biggest shock is the increase in the house rent index by as much as 3.1 per cent in the month of April. This is seen as the largest leap in the housing index.
Such a rise in the house rent index is contrary to common-sense expectations. Since 2016 we have seen a change in the taxation structure. Real estate prices have steadily fallen from the year 2012 when rates were recorded at least unofficially at a high. By the time the next house rent survey is held in July 2018 for CPI computation perhaps we will figure out why the increase in April jolted prices.
Published in The Express Tribune, May 5th, 2018.
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