Consumer price index: Inflation rebounds to alarming levels

Staggering increase in inflation in the first month of current fiscal will challenge new policies.

ISLAMABAD:

After slipping to levels never seen in nine years, inflation rebounded in July to 8.3% on a year-on-year basis, compared to 5.8% year-on-year a month earlier, increasing the prospects of missing the annual inflation target in the very first month of the new financial year.

The sudden rise in inflation is also likely to strengthen the International Monetary Fund’s (IMF) case for increasing Pakistan’s discount rate while terming the existing monetary policy an expansionary one.

Inflation measured by Consumer Price Index (CPI) – the indicator that captures prices of 481 commodities every month, rose to 8.23% in July on a year on year basis, said Arif Cheema, member National Accounts and Prices of Pakistan Bureau of Statistics (PBS).

Cheema said an increase in taxes in the budget and seasonal shocks due to Ramazan were the main contributory factors behind sudden rise in CPI.



The 8.3% inflation level surpassed the expectations of the Ministry of Finance and Planning Division, which was expecting inflation to level around 7.5% in July.

In May 2013, inflation had slipped to 5.1%, the lowest in nine years. The index jumped to 5.9% next month in June, and jumped again by an alarming 2.4% in July, highlighting the patchy road ahead as the government has announced increasing electricity tariffs from this month.

Cheema said that on a month-on-month basis, inflation rose by 2.02% in July 2013 over June 2013. This was the first time in three years that month on month increase in inflation crossed 2%, added Cheema.

For the current fiscal year 2013-14, the government has targeted to keep inflation at 8%. However, according to officials from the planning commission, after the agreement with the IMF over increasing electricity tariffs and levying more taxes, inflation will most likely remain in double digits.

The government has already announced increasing power tariffs for industrial and commercial consumers from 33% to 66%. The tariffs for domestic consumers will go up from October. The depreciating rupee against the US dollar is the other factor that will fuel inflation, they added.

In the budget 2013-14, the federal government levied Rs207 billion in new taxes, and intends to mop up Rs300 billion more in tax revenue through administrative measures and withdrawing tax exemptions during the course of the fiscal year.

According to the PBS, prices of perishable food items increased 21% year on year in July, reflecting the seasonal price impact of Ramazan. The prices of non-perishable food items also increased almost 7% in July. Clothing and footwear prices jumped almost 15% in a single month ahead of Eidul Fitr.

The fuel and food-adjusted inflation also increased to 8.2% year-on-year in July, a jump of 0.4% in a single month. Increasing food and fuel-adjusted inflation underlines risks of double digit inflation.

Independent experts give more importance to core inflation, which excludes food and energy inflation which are susceptible to seasonal price shocks.

Published in The Express Tribune, August 2^nd, 2013.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.