A few days ago a news report quoted IMF’s average inflation projection to hit 14 percent in FY19 which was vetted by an eminent economist’s estimation of CPI at around 13-15 percent. However, these numbers seem to be far from reality and it will not be the first time that IMF forecast would also be far from reality.
Inflation in 1QFY19 is standing at 5.6 percent and for it to average at 14 percent in the full year; the average inflation in Oct-Jun has to be at 16.6 percent. It is a highly unlikely scenario.
The common mistake people are making in forecasting inflation for FY19 is drawing comparisons with FY09. At that time, the currency depreciation took a toll on inflation and some are expecting a repeat. But the numbers tell a different tale. The CPI was 23.9 percent n Sep-08 while the currency was depreciated by 28.8 percent between Sep07-Sep08. Now, between Sep17-Sep18, the currency fell by 17.9 percent while the CPI increase is at a mere 5.1 percent.
And the number won’t be much different in October after incorporating the last hike of 7-8 percent this month. The fundamental difference is that in 2008, food subsidies were removed and that jacked up prices. Today, the food prices at home are already at premium to international prices. (Read: ‘impact of currency depreciation’ published on December 14, 2017)
Major food and other commodities in Pakistan in Nov17 were at premium to international prices, while those were at steep discount in Mar08. And the impact on inflation of depreciation started from Dec17 is not profound.
Let’s look at it from CPI composition perspective. Food has a weight of 35 percent and the sub index was at 1.1 percent in September despite successive rounds of currency depreciation. And the reason is mentioned above. Do not expect food inflation to go out of bound in the next nine months.
The second biggest contributor to CPI is house rent with a 22 percent weight. With real estate prices going down and slowdown in economic activities, the house rent is not likely to go up with currency depreciation or higher oil prices.
The house rent computation is already on the higher side as the sub index grew by 7.6 percent year-on-year in September. The index is calculated once in a quarter and in April18, there was an abnormal hike of 3.1 percent (annualized 12.4%). In big cities like Islamabad (0.0%), Karachi (0.6%) and Lahore (2.9%), the rent hike was low, while in small cities like D.I. Khan, Turbat, Khuzdar and Loralai it was well in double digits. The point is actual house rent index is low and the published number is not showing the real picture.
Anyhow, inflation would be high for electricity, gas, fuels and transportation; but their combined weights are one fifth of food and house rent put together. In case of electricity, the weight is 4.4 percent and even a 20-25 percent in tariff will increase the monthly CPI by 1 percent. House rent is going to be revised in October as well; this along with gas (CPI weight 1.6%) prices increase at worse can enhance the monthly CPI by 2 percent.
Inflation in October 2018 could be 6.5 percent, assuming a 2 percent monthly increase. And even 0.8-1 percent monthly increase every month will take the yearly average in FY19 to 8.1 percent, with CPI at 10-11 percent for a few months.
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