Inflation dips to 12-year low at 1.8% in July

Published: August 4, 2015
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CPI not truly reflecting real inflation.

CPI not truly reflecting real inflation.

ISLAMABAD: 

The pace of increase in prices slowed down to a historic low as inflation inched up only 1.8% in July on a year-on-year basis – the lowest level in 12 years, indicating that the accommodative and expansionary monetary policy of the central bank may continue in coming months.

The July inflation was the lowest since 2003, showed data of the Pakistan Bureau of Statistics (PBS) on Monday.

The Consumer Price Index (CPI) is somehow not truly reflecting the real inflation in the country. For instance, the government slapped a Rs3 per unit electricity surcharge last month, but the data collecting agency did not include it in calculating the inflation.

Read: Expectations of low inflation coming to an end

The PBS takes into account only the increase in electricity tariffs, which are not going up due to falling oil prices. However, instead of passing on the benefit of price reduction to the consumers, the government has slapped new surcharges through the utility bills.

The 1.8% reading beats consumer expectations as a recent survey jointly conducted by the State Bank of Pakistan and the Institute of Business Administration showed that Pakistanis believe prices of food and energy items will go up in the next six months.

However, contrary to these expectations, prices of both food items and petroleum products fell in July, which resulted in only a 1.8% rise in the overall inflation rate.

View of central bank

Official economists and the State Bank of Pakistan do not see any major change in inflation in coming months. The government expectations are that due to a high base impact, the overall inflation will remain at around current levels for a couple of more months.

Even after that, there is no major deviation from the official target of 6% inflation for fiscal year 2015-16.

On the back of a sharp decline in inflation in the previous fiscal year, the central bank cut the key discount rate by 3%, bringing it down to the 43-year low of 7%.

The central bank has predicted a benign inflationary outlook for the current fiscal year as well. However, it has warned that an anticipated increase in energy tariffs and impact of floods on food prices may result in a slight rise in inflation.

The fuel and food-adjusted inflation also slowed down to 4.1% year-on-year in July, a reduction of half a percentage point. Independent experts give more importance to the core inflation, which excludes food and energy prices that are vulnerable to seasonal shocks.

Despite what the analysts describe as “once in decades” opportunity, the government has not fully taken advantage of the low inflation and monetary expansion. A recent report of the central bank states that productive capacity of the economy is weakening due to the low investment-to-gross domestic product ratio.

Read: Low inflation reading keeps bourse in the black

Energy shortages, lack of capital and bureaucratic snags remain the major reasons behind the declining investment in recent years.

According to the PBS, prices of perishable food items fell almost 13% year-on-year in July. Prices of non-perishable food items increased only 2.3% last month over the comparative period. Clothing and footwear prices jumped 4.8%.

Prices are decelerating in the wholesale market as well and the pace of deceleration stood at 2.9% in July – the eighth consecutive month when the Wholesale Price Index remained negative.

The Sensitive Price Indicator that covers the goods used by middle and lower middle classes also decelerated by half a percentage point in July over a year ago.

Published in The Express Tribune, August 4th, 2015.

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Reader Comments (1)

  • Talha
    Aug 4, 2015 - 5:42AM

    I think this government of PMLN is doing quiet well
    people always look at metro and criticize but what about other good things
    are they not good enough to be given credit to PMLNRecommend

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