State Bank of Pakistan (SBP) has said that resurgence in international commodity prices poses risks to the assessment of a continued sharp decline in inflation in the months ahead and average CPI inflation would be over the target by the end of FY09.
According to SBP third quarterly report, the relative ease in inflationary pressures that began in Q2-FY09 continued into Q3-FY09 with all price indices exhibiting a declining trend, however the country would miss its CPI inflation target.
The report said that a rise in international oil prices would have adverse consequences for domestic inflation as well as the external account balance and projected that in FY09 average CPI inflation is expected to stay between 20.5 percent and 21.5 percent as against the target of 11 percent.
The report said that recent easing of inflationary pressures is indeed encouraging as the headline inflation - measured by consumer price index (CPI) - dropped to 17.2 percent on year-on-year (YoY) basis in April 2009 from its peak of 25.3 percent YoY in August 2008.
In particular, a sharp downtrend in food inflation is a welcome development as this component of CPI affects low income groups the most. CPI food inflation fell from its peak of 34.1 percent YoY during August 2008 to 17.0 percent in April 2009.
The recent downtrend in CPI inflation (YoY) was mainly attributed to declining domestic food inflation, principally a reflection of fall in international prices and smooth domestic supply of key staples. Signs of easing of inflationary pressures are also reflected by a decline in persistent component of inflation, which is measured by core inflation, the report said.
The non-food non-energy (NFNE) trimmed 20 percent meaning both the core inflation measures have shown signs of relative ease during April 2009. It said the downtrend in inflation owes to both, favourable international and domestic developments, as well as a deceleration in domestic demand.
The latter, in particular, reflects the monetary tightening by the State Bank, as well as the complementary improvement in fiscal discipline, especially after November 2008. It is worth noting that the acceleration in the fall of inflation is becoming visible only after the magnetisation of the fiscal deficit was halted, the report added.
Going forward CPI non-food inflation is also expected to ease as a result of lagged impact of tight monetary stance, declining international commodity prices, subdued inflationary expectations amid weaker domestic demand and absence of second-round effects due to a relative slowdown in food inflation.
In line with CPI inflation (YoY) other price indices including WPI and SPI also witnessed a downtrend during Q3-FY09. While, inflation is still high it is expected that the downtrend in inflation will gather pace in the next few months. Weak inflation expectations together with evident decline in domestic demand resulted in an ease of the monetary policy in April 2009, the report said.
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