REVIEW OF INFLATION
May 17 - 23, 2010
The inflation rate is a measure of inflation, the rate of increase of a price index. It is the percentage rate of change in price level over time. The rate of decrease in the purchasing power of money is approximately equal.
TRENDS IN GROWTH AND INFLATION
|PERIOD||GDP GROWTH RATE||INFLATION RATE|
In Pakistan, inflationary pressures have strengthened in recent months. All price indices have been exhibiting sharp rise since October 2009. Increase in domestic inflation is mainly attributed to the rise in the prices of energy and prime fuels by the government and depreciating currency value. Moreover, relatively higher international commodity prices of sugar, tea, pulses, rice, and crude oil also fueled inflationary pressures in the economy.
CPI inflation bottomed out at 8.9 per cent in Oct 2009 before rising to 13 per cent in Feb 2010. However, this remains lower than the 21.1 per cent in Feb 2009, and 13.7 per cent in the preceding month.
AVERAGE INFLATION RATE JULY-MARCH IN (%)
Inflationary pressures were more concentrated in food and energy sub-groups in recent months. A higher 20 per cent trimmed mean measure implies that within food and energy sub-groups, inflationary pressures were substantially broad based.
SBP forecasts indicate that inflationary pressures are likely to persist going forward. The crude oil prices would also average above US$80 for the remaining months of 2010. This would also impact domestic inflation in the months ahead.
CONSUMER PRICE INDEX (CPI)
Although CPI inflation during recent months was still lower than the levels seen in the preceding fiscal year, upward pressures on inflation were evident. Specifically, headline CPI inflation rose to 13.0 per cent Year on Year (YOY) in Feb 2010 compared to a local trough of 8.9 per cent recorded in Oct 2009.
The surge in CPI inflation during Feb 2010 is principally attributed to rise in the prices of food commodities, upward adjustment in administered prices of key fuels and electricity tariff relative to the corresponding period last year. In particular, a rise in the international prices of sugar, cotton (thus apparel and textiles), rice, pulses, and tea coupled with weakness in rupee parity led to substantial rise in domestic prices of these commodities.
CPI FOOD INFLATION
CPI food inflation YoY resurged after bottoming out in Oct 2009. It rose from 7.5 per cent in Oct 2009 to 14.9 per cent in Feb 2010, though remained lower than the 22.9 per cent recorded in February 2009. While overall domestic supply of essential food items is largely adequate in FY10, rise in the prices of imported commodities such as sugar, pulses and tea are the main source of acceleration in food commodity prices in recent months.
Moreover, seasonal decline in the prices of food commodities in Feb was absent this year, probably reflecting increased transportation cost of these items.
In particular, domestic sugar prices witnessed an increase of 62 per cent YoY during Feb 2010 on top of 63.6 per cent in Feb 2009. Domestic sugar prices showed declining trend in recent weeks on the back of improved supply in the market and falling international sugar prices.
WHOLESALE PRICE INDEX
WPI inflation rose to 19.3 per cent YoY during Feb 2010 compared with 15 per cent in Feb 2009 and a low of 0.3 per cent in August 2009. Acceleration in WPI inflation came from Sep 2009 due to supply side pressures in some of agriculture commodities led by sugar and pulses (mash, moong), weakening of rupee, and rise in international commodity prices.
In particular, the impact of international commodity prices as well as exchange rate pass-through was relatively strong on WPI basket because most of these are imported items. Even the prices of a large number of POL items in this basket are not administered and determined on the basis of international prices and prevailing rupee exchange rate.
SENSITIVE PRICE INDICATOR
Similar to CPI and WPI, inflation measured by sensitive price indicator (SPI) has also shown sharp increase in recent months after dipping to the lowest level since April 2006 during Oct 2009. Weekly SPI inflation YoY also depicted a rising trend after reaching its 5-year low level in the second week of Oct 2009. SPI inflation was driven principally by rising prices of food commodities. Second large contribution came from the prices of petroleum products.
GLOBAL INFLATION SCENARIO
There are mixed sentiments regarding the recovery in advanced economies. While the risk of deflation in advanced economies is low, a firm recovery remains elusive. Large fiscal stimulus provided some support to the growth in advanced economies. At the same time, managing sustained economic growth with high unemployment will be challenging.
INTERNATIONAL COMMODITY PRICES
International commodity prices have started increasing since August 2009 and trend has become steeper during the last three months. Prices of all commodity groups rose during recent months. Strong demand from emerging economies and prospects of recovery in the developed economies dragged the metal and energy prices higher despite abundant inventories. In addition, bright prospects of wheat, corn and edible oil would help ease international prices in the months ahead.
The challenge for the government is to protect the vulnerable groups of the society by stabilising prices of essential items. Medium-to-long term efforts should envisage agricultural reforms through making agricultural land and labor more productive so that enough quantities are available to meet the fibre and food needs of the country as well as to enhance exports from the country.