Inflation at 12.34 per cent in July, worst yet to come

Authorities are afraid that food prices may increase in coming months due to disruption caused by floods.

ISLAMABAD: Prices of goods and services increased by 12.34 per cent in July, compared to the same month in the previous fiscal year. Authorities are afraid that food prices may increase significantly in coming months due to disruption caused by floods to the supply chain.

The Consumer Price Index, a key indicator of inflation, rose by 12.34 per cent in July over the same period of last year, according to the Federal Bureau of Statistics (FBS).

The numbers validate the State Bank of Pakistan’s concerns about rising inflation. The central bank has estimated average inflation at 12 per cent by the end of the current fiscal year in stark contrast to the government’s understated estimate of 9.5 per cent. This is also the reason that the central bank increased its key interest rate by 0.5 percentage point to 13 per cent.

“The latest inflation numbers are not a surprise but the fear is that the inflation may increase further in coming few months, particularly prices of food, due to disruption of food supply chain caused by the floods,” said Saqib Sherani, Principal Economic Adviser to the Finance Ministry.

Policy options for the authorities will be further complicated by the latest statistics and the government’s expectations of further increases in goods and services prices due to the floods, according to a finance ministry official.

“Due to rising demand and shrinking supply, essential food items’ rates are expected to go up coupled with expected spending on rebuilding of damaged infrastructure.”

The International Monetary Fund will probably pressurise the SBP to further increase its key interest rate at a time when the government would desperately need to borrow money to meet obligatory expenditures by borrowing from the market and the central bank as its revenues will likely decrease.

Out of 10 groups of commodities and services, seven showed double-digit increases last month, said official statistics.

In July, the major category fueling the inflation after food was a 7.6 per cent increase in electricity prices. Fuel and lighting rates increased by 21.8 per cent. Transport and communication prices increased more than 17 per cent.

Food and beverage prices, which carry a 40.4 per cent weight in the commodities’ group, increased by 12.4 per cent in July over the same month of last year, reported the FBS.

The break-up of food and beverage group showed that major increase was recorded in prices of tomatoes, which surged over 32 per cent. The rates of vegetables, potatoes, pulses and sugar also increased significantly.

House rent, having 23.4 per cent weight in the commodities’ basket, increased 8.8 per cent. On monthly basis, inflation in July increased by 1.3 per cent compared to June. After an increase of less than one per cent for two consecutive months, inflation again rose by over one per cent in July.

Published in The Express Tribune, August 12^th, 2010.