Consumers expect low inflation, survey finds

Households’ perceptions over prices yet to bottom out

KARACHI:

Consumers expect low inflation in coming months, according to a survey jointly conducted by the State Bank of Pakistan (SBP) and the Institute of Business Administration (IBA), Karachi.

The September edition of the bi-monthly SBP-IBA Consumer Confidence Index (CCI) shows a “significant increase” of 10.15% over the preceding survey undertaken in July.

CCI clocked up at 165.4 points in September, up 15.24 points from the CCI reading of 150.16 points in July.

An upward movement in the CCI shows improvement in the inflation expectation while a downward trend shows otherwise.

Barring the July edition, the CCI had consistently improved since September 2014, as annual inflation declined to an 11-year low in 2014-15. The CCI reached its highest level in May since the inception of the survey in January 2012.

However, the July edition showed a drop in the CCI reading, which suggested the expectation of low inflation was finally bottoming out among consumers. The latest survey reflects a change in the consumers’ expectations.

The survey covers three broad themes: overall consumer confidence indices, inflationary expectations and other key highlights about households’ perception of important indicators.

The survey uses the CCI to measure households’ perceptions about the economy. Both of the sub-indices, namely Current Economic Conditions (CEC) and Expected Economic Conditions (EEC), also registered an increase of 10% and 10.2%, respectively, over the July edition of the survey.

The survey reveals that consumers believe price increases for food and energy along with non-food and non-energy items are expected to be low for the next six months.

It is important to note that the expectations about inflation actually play a significant role in determining the overall price level in an economy. Economists believe prices go up partly because people expect them to rise.

Year-on-year inflation, measured by the Consumer Price Index (CPI), was 1.7% in August as opposed to 7% in the same month of 2014. The CPI for 2014-15 clocked up at 4.56%, which is notably lower than the average inflation of 8.63% recorded in 2013-14. Low inflation reinforced consumers’ expectations of lower-than-usual inflation following September 2014 amidst falling global oil prices.

According to the SBP, recent hikes in natural and compressed natural gas prices would be offset by lower global oil prices that have ‘yet to find the bottom’. The central bank expects average CPI inflation for 2015-16 to be 4.5%-5.5%, which is less than the government’s target of 6%.

Although the September edition of the survey was formally released on Wednesday, the SBP had cited its findings in the monetary policy decision on September 12 that reduced the benchmark interest rate to a historic low of 6%.

The SBP-IBA team conducts a stratified random telephone survey of more than 1,750 households across Pakistan every two months. Of these, 66% households were fresh interviewees while about 33% households were interviewed in the previous edition as well.

Published in The Express Tribune, September 24^th, 2015.

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