Price stability: December inflation down to single digits

Core inflation still above 10%, overall trend dependent on global commodity prices and govt spending.

ISLAMABAD:

For the first time in over two years, inflation in Pakistan dropped to single digits, with the consumer price index climbing by 9.75% in December, compared to the same period last year, according to data released by the Pakistan Bureau of Statistics on Monday.

The last time the CPI increase hit single digits was 25 months ago in November 2009, when the figure came to 8.9%. In December 2010, the corresponding figure was 15.5%. The average inflation figure for the first six months of the fiscal year ending June 30, 2012 was 10.9%. The government is targeting restricting inflation to below 12% during fiscal 2012.

Given the media’s usual hysterics about inflation numbers, Asif Bajwa, the acting chief statistician at the PBS was somewhat cautious in his remarks.

“The rate at which the prices have been increasing slowed down due to the erosion of the base effect and an easing in food prices. It should not be misconstrued as the prices have declined by 9.75%,” said Bajwa.

Bajwa is leading the newly created PBS which was created by merging the Federal Bureau of Statistics with the Population Census Organisation and the Agriculture Census Organisation.

Even though the CPI increase fell below the psychological single-digit barrier, a more worrying statistic is core inflation, which remained stubbornly in the double digits, clocking in at 10.1%. Core inflation measures inflation without the more volatile food and energy prices and is seen as a reliable barometer of inflation expectations in the economy.

The core inflation number is down from the 10.4% registered in November 2011, but higher than the 9.8% registered in December 2010. Core inflation was in single digits for most of the last two years and only jumped above 10% in August 2011. “The fact that core inflation is high means that inflation has effectively seeped into everything,” said one SBP official who wished to remain anonymous.

The consumer price index number was helped by the fact that the prices of food and non-alcoholic beverages – the single largest segment of the index by weight – went up by 9.5% in December compared to the same period last year. Housing and utilities – the second largest item in the index – went up by an even slower annualised rate of 6.5%.

The last time Pakistan ended a fiscal year with single digit inflation was in 2006. Since then, the increases have been driven by increase in international commodity prices and high government spending financed in part by borrowing from the central bank (also called printing excess money).

Analysts welcomed the return to single-digit inflation, but in cautious terms. “It is welcoming trend and could be sustained in the months ahead if the international commodity prices do not increase and the government keeps controlling its expenditures,” said Ijaz Nabi, an economist associated with the World Bank.

Finance Minister Abdul Hafeez Shaikh had claimed that during the first half (July-December) of the current fiscal year, the government’s current expenditures clocked in at 38% of the total estimated annual expenses – about 4% lower than the targeted expenses for the first half.

WITH ADDITIONAL INPUT BY FAROOQ TIRMIZI

Published in The Express Tribune, January 3^rd, 2012.