Price movements: Deflationary fears emerge as inflation at 11-year low

[Kambojaric]

ISLAMABAD:
Amid concerns over deflation that according to a school of thought has already begun, inflation rose 3.2% in retail markets in February over a year ago, reported the Pakistan Bureau of Statistics (PBS) on Monday.

Inflation measured by the Consumer Price Index (CPI) remained at an 11-year low for the fourth consecutive month and stood at 3.24%, said the national data collecting agency.

The CPI tracks prices of 481 commodities every month in the retail market.

The slowdown sparks expectations of a further cut in the discount rate. The State Bank of Pakistan slashed the discount rate by 100 basis points to 8.5% in its last monetary policy announcement.

Some board members were in favour of a minimum 150-basis-point reduction but the finance secretary, who is also a board member, supported the 100-basis-point reduction.

Wholesale Price Index

The Wholesale Price Index that captures prices in the wholesale market fell for the third consecutive month and touched a negative 3.4% in February over a year ago, said the PBS.

The impact of reduction in prices in the wholesale market appears in the retail market with a lag of about six months, according to independent economists.

The underlying inflationary pressures also seemed to be easing, as the fuel and food-adjusted inflation, known as core inflation, slowed down to 6.2% on a year-on-year (YoY) basis in February, a reduction of 0.2% over the previous month. Additionally, core inflation came down for the sixth consecutive month.

On monthly basis, the CPI-measured prices also turned negative. The CPI decelerated almost 1% in February over January. A debate has already started whether the country was heading towards deflation – a period when there is low level of demand in the economy, which ultimately leads to economic depression.

Dr Ashfaque Hasan Khan, former adviser to the Ministry of Finance, has been arguing that the country has already entered a deflationary phase. In addition to quoting official price statistics to substantiate his claim, Khan also cites the example of slowing growth in large-scale manufacturing and declining tax revenues.

His arguments were contested by Secretary Finance Dr Waqar Masood, former State Bank governor Dr Ishrat Husain and Finance Minister Ishaq Dar during a recently held meeting of the Economic Advisory Council.

The opponents of deflation argued that the CPI and WPI were capturing the price trends only in the formal sector of the economy. Husain and Masood were of the view that in the informal sector the prices were still increasing that would avert chances of deflation, said Dar while talking to The Express Tribune.

However, the government’s argument against deflation strengthens hands of those who say the CPI was not capturing the real price trends in the economy and monthly inflationary bulletin was no more reliable source of information.

According to the PBS, in February the food and non-alcoholic beverages group inflation rose to only 1.1% on year-on-year basis. In February, there was an increase of 1% in non perishable food items while the perishable food items soared only 2.2% over a year ago.

The average inflation during eight months of the current fiscal year (July-February) rose to 5.5% as compared to the same period of the previous fiscal, according to the PBS.

For the new fiscal year, the government has set the inflation target at 8%, which it is expected to achieve on back of reduction in commodities prices in the international market. The reduction in the pries of petroleum products remained the main driving force behind steep decline in overall inflation index.

Price movements: Deflationary fears emerge as inflation at 11-year low – The Express Tribune
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Interest Rates need to be decreased even more to prevent any deflation. Its pretty bizzare how we have ended up from double digit inflation to almost deflation. Now's the perfect time to derease interest rates and boost the gdp growth rate.

 

[Sulman Badshah]

Inflation should be stable at 5-7 %...

 

[ajpirzada]

so why is it a problem? core inflation is still 6.2%. Not to forget, core inflation is not free of changes in energy prices.

 

[senses]

The biggest flaw in CPI is the quantities are fixed while the price changes monthly, we are assuming a person who assumed x amount in 2007, still consumes that much of amount in 2015.

 

[pursuit of happiness]

The biggest flaw in CPI is the quantities are fixed while the price changes monthly, we are assuming a person who assumed x amount in 2007, still consumes that much of amount in 2015.

is your base is 2007
can you give me link of what goes in accounting cpi in pak?

indian inflation number just for info
Index Numbers of Wholesale Price in India (Base: 2004-05=100), Review for the month of January, 2015


The official Wholesale Price Index for ‘All Commodities’(Base: 2004-05 = 100) for the month of January, 2015 declined by 0.8 percent to 178.3 (provisional) from 179.8 (provisional) for the previous month.


INFLATION


The annual rate of inflation, based on monthly WPI, stood at -0.39% (provisional) for the month of January, 2015 (over January, 2014) as compared to 0.11% (provisional) for the previous month and 5.11% during the corresponding month of the previous year. Build up inflation rate in the financial year so far was -1.11% compared to a build up rate of 5.23% in the corresponding period of the previous year.


Inflation for important commodities / commodity groups is indicated in Annex-1 and Annex-II.

The movement of the index for the various commodity groups is summarized below:-


PRIMARY ARTICLES (Weight 20.12%)


The index for this major group declined by 1.0 percent to 246.6 (provisional) from 249.0 (provisional) for the previous month. The groups and items which showed variations during the month are as follows:-


The index for ‘Food Articles’ group declined by 0.1 percent to 252.4 (provisional) from 252.7 (provisional) for the previous month due to lower price of egg (4%), jowar (3%), beef & buffalo meat and mutton (2% each) and fruits & vegetables and fish-inland (1% each). However, the price of urad (7%), masur and gram (5% each), arhar, moong and barley (4% each), maize (3%), fish-marine and bajra (2% each) and ragi, wheat, pork and condiments & spices (1% each) moved up.


The index for ‘Non-Food Articles’ group declined by 0.7 percent to 207.6 (provisional) from 209.1 (provisional) for the previous month due to lower price of flowers (9%), cotton seed (7%), raw silk (5%), raw cotton (3%), sunflower, gingelly seed and castor seed (2% each) and fodder (1%). However, the price of niger seed (6%), raw rubber (5%), copra (coconut) (4%), soyabean (3%), rape & mustard seed and mesta (2% each) and gaur seed and groundnut seed (1% each) moved up.


The index for 'Minerals’ group declined by 7.6 percent to 301.1 (provisional) from 325.7 (provisional) for the previous month due to lower price of barytes (19%), copper ore (16%), crude petroleum (11%), magnesite (5%) and manganese ore (1%). However, the price of zinc concentrate (16%), steatite (3%) and limestone, phosphorite and sillimanite (1% each) moved up.


FUEL & POWER (Weight 14.91%)


The index for this major group declined by 2.5 percent to 189.7 (provisional) from 194.6 (provisional) for the previous month due to lower price of aviation turbine fuel (14%), furnace oil (6%) and petrol and high speed diesel (4% each).


MANUFACTURED PRODUCTS (Weight 64.97%)


The index for this major group declined by 0.3 percent to 154.5 (provisional) from 154.9 (provisional) for the previous month. The groups and items for which the index showed variations during the month are as follows:-


The index for ‘Food Products’ group declined by 0.6 percent to 171.6 (provisional) from 172.7 (provisional) for the previous month due to lower price of tea leaf (blended) (8%), tea leaf (unblended) (7%), oil cakes (4%), sugar and khandsari (2% each) and sunflower oil (1%). However, the price of groundnut oil and sugar confectionary (5% each), copra oil (3%), mustard & rapeseed oil and wheat flour (atta) (2% each) and sooji (rawa), mixed spices, rice bran oil, maida, tea dust (unblended), palm oil and soyabean oil (1% each) moved up.


The index for ‘Beverages, Tobacco & Tobacco Products’ group rose by 0.1 percent to 202.0 (provisional) from 201.8 (provisional) for the previous month due to higher price of dried tobacco and soft drinks & carbonated water (1% each). However, the price of rectified spirit (1%) declined.


The index for ‘Textiles’ group declined by 1.2 percent to 140.5 (provisional) from 142.2 (provisional) for the previous month due to lower price of cotton yarn (3%), man made fabric and man made fibre (2% each) and cotton fabric (1%). However, the price of tyre cord fabric (4%), gunny and hessian cloth and jute sacking cloth (3% each), jute sacking bag (2%) and jute yarn (1%) moved up.


The index for ‘Paper & Paper Products’ group rose by 0.1 percent to 151.4 (provisional) from 151.2 (provisional) for the previous month due to higher price of books/ periodicals/ journals and corrugated sheet boxes (1% each). However, the price of paper pulp (2%) and printing and writing paper (1%) declined.


The index for ‘Leather & Leather Products’ group declined by 1.8 percent to 143.8 (provisional) from 146.4 (provisional) for the previous month due to lower price of leathers (5%) and leather footwear (1%).


The index for ‘Rubber & Plastic Products’ group declined by 0.2 percent to 149.4 (provisional) from 149.7 (provisional) for the previous month due to lower price of rubber transmission belt (6%), plastic/pvc shoes (4%), plastic/pvc pipe (3%), rubber footwear (2%) and plastic/ldpe/polythene bag, plastic films & sheets, plastic bottles, polyester film, plastic/pvc chappals and hdpe bag (1% each).


The index for ‘Chemicals & Chemical Products’ group declined by 0.5 percent to 151.9 (provisional) from 152.7 (provisional) for the previous month due to lower price of rubber chemicals (7%), non-cyclic compound (3%), synthetic resin and basic organic chemicals (3% each) and basic inorganic chemicals (1%). However, the price of organic manure (7%), hair / body oils (3%), tooth paste / tooth powder (2%) and castor oil, di ammonium phosphate and pesticides (1% each) moved up.


The index for ‘Non-Metallic Mineral Products’ group rose by 0.6 percent to 172.9 (provisional) from 171.9 (provisional) for the previous month due to higher price of grey cement (2%) and asbestos corrugated sheet, glass bottles & bottleware and lime (1% each). However, the price of bricks & tiles (4%), marbles (3%) and slag cement (1%) declined.


The index for ‘Basic Metals, Alloys & Metal Products’ group declined by 0.1 percent to 164.7 (provisional) from 164.8 (provisional) for the previous month due to lower price of slab (5%), pig iron (4%), zinc and steel structures (2% each) and ferro silicon, steel rods, CRC, angles, rebars, silver and HRC (1% each). However, the price of iron castings (4%), nuts/bolts/screw/ washers (2%) and pipes/tubes/rods/strips, gold & gold ornaments, sheets, plates and billets (1% each) moved up.


The index for ‘Machinery & Machine Tools’ group rose by 0.2 percent to 135.2 (provisional) from 134.9 (provisional) for the previous month due to higher price of heating elements (5%) and industrial furnaces, electric motors, thresher, electric generators, lamps, electronic pcb /micro circuit, washing / laundry machines, earth moving machinery and ball/roller bearing (1% each). However, the price of heat exchanger (6%) declined.



FINAL INDEX FOR THE MONTH OF NOVEMBER, 2014 (BASE YEAR: 2004-05=100)



For the month of November, 2014, the final Wholesale Price Index for ‘All Commodities’(Base: 2004-05=100) stood at 181.2 as compared to 181.5 (provisional) and annual rate of inflation based on final index stood at -0.17 percent as compared to 0.00 percent respectively as reported on 14.11.2014.

 

[senses]

Yea base is 2006-7, just studied this in my eco class today, i think in our basket most highly ranked things are food and bills/rent.

 

[SBD-3]

so why is it a problem? core inflation is still 6.2%. Not to forget, core inflation is not free of changes in energy prices.

Core inflation is NFNE (Non-Food, Non-Energy) Measure.

The biggest flaw in CPI is the quantities are fixed while the price changes monthly, we are assuming a person who assumed x amount in 2007, still consumes that much of amount in 2015.

Consumption basket weights are changed time to time. If the composition of basket is changed every month, the inflation would not be comparable anymore to previous readings because of changes in the consumption basket. Furthermore, it would also be very difficult to ascertain and separate the change due to price from change in index arising from change in consumption basket.

 

[ajpirzada]

Core inflation is NFNE (Non-Food, Non-Energy) Measure.

that only removes the direct effect of energy prices on inflation. The indirect effect through cost of production for firms is still there.

 

[SBD-3]

that only removes the direct effect of energy prices on inflation. The indirect effect through cost of production for firms is still there.

For that there is a separate index, WPI. And that index is pretty suppressed as well

 

[ajpirzada]

For that there is a separate index, WPI. And that index is pretty suppressed as well
View attachment 198956

my point is that whatever price index you take, effect of energy prices will always be there. Energy prices play a direct role in determining the cost of production which then shows up in CPI and WPI. WPI is simply the prices producers/traders are charging each other rather than the consumers. Both CPI and WPI reflect the production costs nonetheless.

i dont want to make things overly complicated but CPI is always relatively less responsive to cuts in production costs. Producers/traders dont pass on all the benefit to the consumers. Thus we are seeing WPI being much lower than the CPI for the same period following the sharp decline in energy prices.

Anyways, the key question is: why is deflation (be it CPI or WPI) a problem when it is triggered by fall in production costs? such deflationary episode can only be a problem if small to large scale businesses in the country are heavily dependent on debt. is this the case in Pakistan? I am not too sure.