Despite power price hikes, inflation falls to 17-month low of 5.8%

Rreduction has surprised many as analysts were expecting a surge in inflation owing to 25% power price hike, floods

ISLAMABAD: Despite a 25% increase in electricity prices implemented through surcharges and floods disrupting food supplies, inflation has fallen to a 17-month low of just 5.8% in October. 

The pace of increase in prices measured by the Consumer Price Index (CPI) slowed down to 5.8% in October over the same period last year, an inflation bulletin released by the Pakistan Bureau of Statistics (PBS) on Wednesday.

The CPI indicator captures prices of 481 commodities every month.

In June 2013, inflation had been clocked in at 5.9%. The decline in the pace was below the expectations of the government, which was expecting that inflation would remain slightly over six per cent in October.

However, the reduction has surprised many as analysts were expecting a surge in inflation due to the increase in electricity prices and a break in the food supply chain following floods in Punjab and Azad Jammu and Kashmir. Independent economists have also been calling to review the methodology being used to work on unemployment and economic growth rates.

Through two separate notifications, the federal government had last month imposed 52 paisas per unit and Rs1.50 per unit equalisation surcharges on electricity consumers. Interestingly, the PBS did not calculate the impact of these increases on electricity prices.

House rent was the only item that the PBS showed to have increased by 1.4% in October.

The PBS does not include the fuel price adjustment and electricity surcharges in its calculations, said Director Prices PBS Shaukat Zaman.

The latest statistics suggest that warnings of the Ministry of Finance and the State Bank of Pakistan about an increase in prices due to floods was wrong because prices went down despite the flood, PBS claimed.

According to initial estimates of the National Disaster Management Authority (NDMA), the floods have affected crops cultivated on 2.4 million acres of land.

However, according to the PBS, food inflation in October remained at 5.2% on a year-on-year basis -the index that had been recorded at 7.2% in September - a reduction of 2% in a single month. PBS data showed that on monthly basis, the prices actually decreased in October over September as the index was negative 0.2%.

The pace of increase in perishable food items slowed to 4.84% in October from over a year ago, the ratio that was 4.32% in the case of non-perishable food items, according to the PBS.

Fuel and food-adjusted inflation, known as core inflation, also decreased to 7.8% year-on-year in October, with a reduction of 0.3% in a single month.

With reduction in both core inflation and the overall headline inflation, the SBP may have to review its monetary policy due in November. In the last announcement, the SBP kept the discount rate unchanged at 10% in an anticipation of inflationary pressure.

The average inflation during first the four months of the current fiscal year (July-October) remained at 7.1% as compared to the same period of the previous fiscal year, according to the PBS. For the new fiscal year, the government has set the inflation target at 8%.