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Amid growing disbelief over the calculation methodology, the pace of increase in prices of essential items slowed down to 5.1% in May, the lowest in more than nine years, increasing chances of a cut in the benchmark interest rate in the upcoming monetary policy.
According to data released by the Pakistan Bureau of Statistics (PBS) on Monday, inflation measured by the Consumer Price Index (CPI), the most closely watched indicator, clocked in at 5.1% in May over a year ago.
In March 2004, inflation had been at 4.31% and in April 2004, it had been at 5.34%. In April this year, inflation stood at 5.8%.
The slowdown may prompt the central bank to slash its interest rate in the monetary policy announcement due on June 13. This will be the first monetary policy under the new political setup.
We believe that a subdued inflation [figure] will provide room for the State Bank to cut the policy rate by 50 basis points to 9% in the Monetary Policy Statement, Shajar Capital Pakistan Private Limited said in a note issued to clients.
Its analysis shows that the CPI will stay in single digits, but a looming risk to the state of economy is the countrys external position and its consequent impact on the currency.
The low inflation figure will also strengthen Pakistans bargaining position in a future bailout programme with the International Monetary Fund. However, the State Bank of Pakistans (SBPs) analysis shows that despite a significant drop in interest rates in the past, private sector credit has not been picking up. One of the reasons is said to be the federal governments increasing financing needs, which left little credit for the private sector.
With the persistent decrease in inflation, calls have also been growing for a review of the calculation methodology, as the numbers seem to be contrary to ground realities. Experts attribute the fall in CPI inflation to a change in the way house rent and gas prices are calculated the two major items that have almost one-fourth weight in the CPI basket.
For arriving at house rent, which carries 21.82% weight in the CPI basket, the PBS used to take an average over 24 months. But now the rent is determined on the basis of a monthly survey, which experts say is distortive and does not reflect real change.
Similarly, the previous government reduced gas slabs from four to three, which led to a reduction in gas prices of 46% every month since the change took place. Gas prices have a 1.58% weight in the CPI basket. In May again, gas rates shrank 46% over a year ago.
There are many problems with the methodology that the PBS uses to determine the pace of price increase, said Mehmood Khalid, a research economist working with Pakistan Institute of Development Economics.
He said another factor that is contributing to the slow pace of price increase is the high base impact, and that inflation is bound to slow down further until the high base in neutralised.
However, inflation may start picking up in coming months if the new government decides to phase out power subsidies.
Fuel and food-adjusted inflation, called core inflation, eased to 8.1% in May over a year ago. Experts give more importance to core inflation, which is not affected by seasonal price shocks due to the exclusion of volatile food and energy prices.
Average inflation in the first 11 months (July-May) of the current fiscal year remained at 7.5% over the comparative period of last fiscal year, according to the PBS. For the current fiscal year, which is coming to a close this month, the target for average inflation has been revised downward to 9% from the earlier 9.5%.
The drop in average inflation will also lead to a revision in next years target, as the planners are anticipating price increase at the rate of 8.5% in 2013-14.
Inflation slows further, hits lowest in nine years – The Express Tribune
According to data released by the Pakistan Bureau of Statistics (PBS) on Monday, inflation measured by the Consumer Price Index (CPI), the most closely watched indicator, clocked in at 5.1% in May over a year ago.
In March 2004, inflation had been at 4.31% and in April 2004, it had been at 5.34%. In April this year, inflation stood at 5.8%.
The slowdown may prompt the central bank to slash its interest rate in the monetary policy announcement due on June 13. This will be the first monetary policy under the new political setup.
We believe that a subdued inflation [figure] will provide room for the State Bank to cut the policy rate by 50 basis points to 9% in the Monetary Policy Statement, Shajar Capital Pakistan Private Limited said in a note issued to clients.
Its analysis shows that the CPI will stay in single digits, but a looming risk to the state of economy is the countrys external position and its consequent impact on the currency.
The low inflation figure will also strengthen Pakistans bargaining position in a future bailout programme with the International Monetary Fund. However, the State Bank of Pakistans (SBPs) analysis shows that despite a significant drop in interest rates in the past, private sector credit has not been picking up. One of the reasons is said to be the federal governments increasing financing needs, which left little credit for the private sector.
With the persistent decrease in inflation, calls have also been growing for a review of the calculation methodology, as the numbers seem to be contrary to ground realities. Experts attribute the fall in CPI inflation to a change in the way house rent and gas prices are calculated the two major items that have almost one-fourth weight in the CPI basket.
For arriving at house rent, which carries 21.82% weight in the CPI basket, the PBS used to take an average over 24 months. But now the rent is determined on the basis of a monthly survey, which experts say is distortive and does not reflect real change.
Similarly, the previous government reduced gas slabs from four to three, which led to a reduction in gas prices of 46% every month since the change took place. Gas prices have a 1.58% weight in the CPI basket. In May again, gas rates shrank 46% over a year ago.
There are many problems with the methodology that the PBS uses to determine the pace of price increase, said Mehmood Khalid, a research economist working with Pakistan Institute of Development Economics.
He said another factor that is contributing to the slow pace of price increase is the high base impact, and that inflation is bound to slow down further until the high base in neutralised.
However, inflation may start picking up in coming months if the new government decides to phase out power subsidies.
Fuel and food-adjusted inflation, called core inflation, eased to 8.1% in May over a year ago. Experts give more importance to core inflation, which is not affected by seasonal price shocks due to the exclusion of volatile food and energy prices.
Average inflation in the first 11 months (July-May) of the current fiscal year remained at 7.5% over the comparative period of last fiscal year, according to the PBS. For the current fiscal year, which is coming to a close this month, the target for average inflation has been revised downward to 9% from the earlier 9.5%.
The drop in average inflation will also lead to a revision in next years target, as the planners are anticipating price increase at the rate of 8.5% in 2013-14.
Inflation slows further, hits lowest in nine years – The Express Tribune
