Inflation jumps to 14.6% in Jan 2020

Highest level recorded in past over nine years due to rise in food and energy cost


Shahbaz Rana February 02, 2020
A shopping cart is pushed down the aisle in this REUTERS photo illustration.

ISLAMABAD: Pakistanis have borne the highest inflation in past over nine years at the start of New Year that hit 14.6% in January due to an increase in food and energy cost, which also made the tight monetary policy ineffective.

Based on a new methodology, the headline national Consumer Price Index (CPI) jumped to 14.6% in January over a year ago, the Pakistan Bureau of Statistics (PBS) reported on Saturday.

This was the highest inflation reading in nine years. Last time inflation had been recorded at 15.5% in December 2010.

In a single month, the headline inflation increased by 2%, which was quite alarming at a time when people’s wages were shrinking. This is for the first time in recent years that the headline inflation reading has surpassed the State Bank of Pakistan’s (SBP) key policy rate of 13.25%.

Dr Reza Baqir-led central bank has been targeting the headline
inflation instead of core inflation for setting the policy rate. The new central bank approach may warrant a further hike in the discount rate, although the core inflation was still far lower than the key policy rate.

The critics of the central bank’s new monetary policy approach argue that the inflation in Pakistan was cost-push, which the SBP was trying to quell by suppressing demand in the economy.

The core inflation, calculated after excluding energy and food prices, increased in both urban as well as rural areas last month. In the urban areas, it surged to  7.9% in January compared to 7.5% in the preceding month, according to PBS.

In rural areas, the core inflation hit 9% last month.

The pace of inflation is skyrocketing at a time when the economic activity, both in the formal as well as informal sectors, is slowing down, which has made it difficult for the people to cope with the situation.

Officially, Pakistan is in stagflation - a condition in which the economic growth rate is slow while unemployment and prices of goods and services are high.

In the last monetary policy review, the central bank kept its policy rate unchanged. After the fresh reading, the real interest rates have become 5.35% positive - the difference between the core inflation and key policy rate of 13.25%. The banking sector has been making windfall gains due to high-interest rates.

The high-interest rates have helped attract $2.9 billion in the government’s debt securities which have temporarily built the official foreign exchange reserves but are considered a risky venture in the long run.

The central bank’s tight monetary policy does not affect the prices of food items that are increasing because of supply shocks, increase in sales tax rates and monopoly of few businesses.

The average prices of food and non-alcoholic beverages, which have 34.6% weight in the CPI basket, surged 14.7% in January over a year ago, according to the PBS.

The alcoholic beverages and tobacco group inflation increased by 78.5% last month. Similarly, the housing, water, electricity, gas and fuels group - having onefourth weight in CPI basket, increased 9.6% last month.

The transport fares, having 5.9% weight in CPI basket, increased on an average 18.6% in January over a year ago. Prices of tomatoes surged 157.7% and onions 125.3% in January compared to the same month of the previous year, which once again underscores that inflation cannot be controlled by keeping the interest rates high.

The PBS calculates the inflation index by monitoring prices of 356 commodities in 35 cities and 244 goods in 27 rural markets. The impact of food inflation was more pronounced in rural areas than in urban centres.

The food inflation in urban areas stood at 19.5% in January over a year ago while in rural areas the food inflation jumped to 23.8%.

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