Inflation eases to 8.2% in May

Pace of reduction slows due to hike in food prices in Ramazan

ISLAMABAD: The inflation rate eased for the fourth successive month and stood at 8.2% in May 2020 despite a seasonal spike in prices of essential food items, Pakistan Bureau of Statistics (PBS) reported on Monday.

However, the pace of reduction slowed down last month due to rise in prices of food items during Ramazan that partially offset the impact of fall in petroleum product prices.

The 8.2% inflation reading was the lowest in the past 11 months. Last time in June 2019, inflation had been recorded at 8% – the level from where it had started rising and peaked at 14.6% in January this year.

Economic activities that largely remained at a standstill due to partial lockdown in the country in the wake of Covid-19 pandemic, were restored significantly in the second half of May.

The pace of inflation slowed down both in urban and rural areas. PBS calculates the reading by monitoring prices of 356 commodities in 35 cities and 244 goods in 27 rural markets.

The inflation rate eased to 7.3% in urban areas and to 9.7% in rural areas. However, food inflation rose both in urban and rural areas.

The food inflation in urban areas that stood at 10.4% in the preceding month, increased to 10.6% in May. In rural areas, the pace of food inflation surged from 12.9% in April to 13.7% last month.

Prices of a majority of perishable food items went up compared to the preceding month.

Food inflation in May escalated by 1.63% on a month-on-month basis due to a considerable hike in prices of key kitchen items including chicken, potato and onion.

Owing to its higher weight, the food inflation offset a 15% reduction in domestic fuel prices, which pushed down the transport index by 6.5% month-on-month.

Core inflation, calculated by excluding food and energy prices, went down in urban and rural areas. The core inflation in urban areas slowed down from 6.4% to 6.3% and in rural areas it slipped from 8.5% to 8.4%.

The headline inflation is slightly positive and urban core inflation is lower than the key policy rate of 8%. The real interest rate, keeping in view the core inflation, is still positive by 1.7%.

The central bank last month further reduced the interest rate by one percentage point but it was lower than market expectations and the desire expressed by Prime Minister Imran Khan to cut the rate to 7%, said the sources.

Earlier for almost nine months, the central bank kept the interest rate unchanged at 13.25% to attract hot foreign money, which dampened economic growth prospects besides increasing the debt servicing cost.

The Planning Commission has recommended to the Monetary and Fiscal Policies Coordination Board to adopt accommodative monetary and fiscal policies in order to boost the economy.

The commission expects average inflation rate of 6% in the next fiscal year, which is lower than the prediction made by the International Monetary Fund (IMF) and the State Bank of Pakistan (SBP).

After the recent cut in interest rate to 8%, the real interest rate is expected to remain in the negative region.

“We believe negative real interest rate phenomenon will be temporary as we anticipate inflation to slow down further once food prices normalise in the coming months,” said KASB Research.

PBS reported that prices of the food and non-alcoholic beverages group, with 34.6% weight in the CPI basket, increased to 12.2% in May over the same month a year ago.

Perishable food prices increased 13.5% last month compared with over 11% in the preceding month.

The alcoholic beverages and tobacco group inflation eased to 6.4% from 11.8% a month earlier.

Similarly, the housing, water, electricity, gas and fuel group – having one-fourth weight in the CPI basket, recorded a rise of 6.4% last month.

Transport group inflation was negative 7.5% due to a major cut in petroleum product prices.

Average inflation in 11 months (July-May) stood at 11%, which was broadly in line with the expectation of authorities.

The KASB Research estimated that inflation would average 10.7% during the current fiscal year, slightly below SBP’s forecast of 11-12%.