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The inflation dragon has resurfaced; a month right after the second round of currency depreciation. Core inflation in April-18 stood at 7.0 percent; highest since October-14. And the headline inflation for April-18 came at 3.7 percent against the industry expectation of 2.8 percent.

On a monthly basis, CPI has increased by 1.8 percent, which has anchored higher inflation going forward. The food inflation in the same month has increased by 1.5 percent over previous month, which is little surprising as SPI indicators are showing a decline. The hike in food prices is not worrying as the index has been falling since December-17; it’s more of seasonal correction as perishable food index increased by 6.2 percent over March-18 but has declined by 10.1 year on year.

The shocking news is that house rent index has increased by 3.1 in April, which is effectively a quarterly change as house rent is surveyed every third month. Since the index is rebased in 2007-8, this is the biggest jump in housing index - average increase in the past 28 quarters stood at only 1.6 percent – almost half of the increased in April-18.

This increase in house rent index (almost double of the average increase) is counterintuitive as the real estate’s northward journey has been arrested since July-16 due to change in taxation structure. There are no official numbers for real estate prices, though Zameen.com is computing the property price index for the past few years. According to the portal data, property prices grew by 126 percent from 2012 up till March-18; growing by 59 percent between 2012 and 2014; by 24 percent between 2014 and 2016 and by 9 percent since then. The analysts have been modeling future prices by assuming a decline in house rent index due to the depressed real estate market. However, the house rent index has contributed to one third of headline inflation increase in April-18. What has triggered this unexpected hike in house rents is something worth exploring.

In Business Recorder April 10, 2018 issue, Dr. Hafiz Pasha wrote, “According to PBS, it (house rent index) has increased annually by 6 percent during the last four years. However, the Household Integrated Economic Surveys (HIES) by PBS reveal that the rate of inflation in housing rents from 2011-12 to 2015-16 was as high as 11 percent”. It seems as if Pasha’s findings have made PBS revisit their methodology of computing house rent index; and they found some variation in the data from the HIES and have changed the numbers accordingly in April’s publication.

The question is whether this a one-off change or the alternation in computation, if any, would result in steep price hike in subsequent quarterly house rent surveys as well. Intuitively, higher rent increase between FY11-16 makes sense as pointed out by Dr. Pasha; and since property price increase has been arrested from July-16, the house rent inflation, according to HIES, should slow down.

Well, this mystery would be unfolded by July-18 when the next house rent survey is conducted for CPI computation. Whatever it is, the increase in April has jolted the prices. The higher core inflation along with the 10 percent currency depreciation since December-17 will anchor higher inflationary expectation, which could become a self-fulfilling prophecy.

The monetary policy committee must look at this change critically; and the SBP’s forecasting and Policy Analysis System (FPAS) variables must change to come up with a model-based recommendation for monetary tightening in the upcoming reviews.

Copyright Business Recorder, 2018

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