Surprising statistics: Inflation falls to 7% in August

Prospects of reduction in discount rate increase.

ISLAMABAD:

The rapid increase in prices of essential commodities has slowed down to what they were in the post-election period, as inflation fell to 7% on a year-on-year (YoY) basis in August, increasing prospects of a reduced discount rate in the upcoming monetary policy announcement.

Inflation measured by the Consumer Price Index (CPI) – an indicator that captures prices of 481 commodities every month – rose to 6.99% in August on a YoY basis, according to the Pakistan Bureau of Statistics (PBS) on Monday. It was the lowest since July last year.

In June 2013, when the PML-N government came into power, the CPI-based inflation had been recorded at 5.9% – jumping to 8.3% within one month. Since then it remained above the 7.5% mark.

The latest reduction has taken the analysts by surprise as they were expecting inflation to clock in at 8.2%.  The downward slide was recorded both in the prices of food and non-food items, according to the PBS data. The food inflation slipped to 5.6% while non-food inflation decreased to 8.1%.

In July this year, the overall index rose to 7.9% on a year-on-year basis and there was an almost one percentage point reduction in a single month that highlighted prospects of reduction in the key discount rate. The State Bank of Pakistan (SBP) is expected to announce monetary policy for next two months. In the last monetary policy announcement, the board of the SBP had kept the discount rate unchanged at 10%.



However, according to analysts, SBP may retain the discount rate in a bid to use the monetary policy as a tool to build foreign currency reserves after the recent slide in the level of reserves.

According to the PBS, the rate of increase in prices of perishable food items slowed down to 6.2% year-on-year in August. The prices of non-perishable food items also slowed down to 4.7% last month. Clothing and footwear prices remained at 9.2%.

The highest increase was in the category of alcoholic beverages and tobacco groups as the prices soared by 22.6%.

In food, the price of potatoes increased by 113.8% in August in comparison to the corresponding period of previous year, suggesting measures to curtail the rates were unsuccessful. The federal government has allowed duty-free import of 300,000 metric tons of potato to check the prices in the domestic market. Pulse moong rates increased about 21.5% and there was a 22.8% increase in prices of cigarettes due to increase in taxes from July this year.

The fuel- and food-adjusted inflation also slowed down to 7.8% year-on-year in August, a reduction of 0.4% in a single month. The slowdown in the pace suggests that the inherent risks of double-digit inflation are abating. Independent experts give more importance to core inflation, excluding food and energy, which are susceptible to seasonal price shocks.

The average inflation during the first two months (July-August) of the fiscal year remained at 7.44% as compared to the same period of the previous fiscal.

For the new fiscal year, the government has set the inflation target at 8% as any significant curtailment is not possible due to rationalisation of subsidies, monetary overhang and rising demand, according to the Annual Plan for 2014-15.

Published in The Express Tribune, September 2^nd, 2014.

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