Don't panic to see CPI at 8.2 percent in Feb19 - last time 8 percent plus inflation was recorded in Jun14. The market was expecting even higher at around 8.5 percent, and the number may remain north of 8 percent in Mar19 before the high base effect of abnormal hike in house rent index posted in Apr18 starts diluting - for details read "CPI -unfolding house rent index mystery", published on 3rd May, 2018. .
On monthly basis, the CPI increased by 0.64 percent in Feb19 - within it, food prices increased by 1.56 percent to jack up the index. Perishable food items price volatility is nothing new, as because of low shelf life, these food commodities fluctuate heavily due to short term supply demand issues. This time, it is tomato giving wrong signals, especially in weekly SPI index.
Some economists have used the term of stagflation, seeing surge in SPI from 5.5 percent to 10.6 percent within 9 weeks. The term is in fashion as economic slowdown is visible along with unemployment, and a few economists are using short term surge in perishable food inflation to pronounce stagflation. That is wrong – in the week ending 28th Feb, tomato prices increased by 257 percent over same week last year - Its contribution is around 2.5-3 percent in 10.7 percent increase in SPI, i.e. around 25-30 percent of price increase is due to tomato.
It is important to note that the exact contribution of tomato in SPI may be different. The methodology is based on Laspeyres formula and any individual item contribution in the total price index is based on price and quantity in the base period. Such information is not public, hence exact impact of any sub item price index cannot be computed. For simplicity, the impact on simple weighted average is presented here, which may be a bit different from the methodology deployed.
In CPI, the tomato prices increased by 150 percent over previous month and 179 percent as compared to same month last year. Based on simple weighted average, had the tomato prices remained unchanged, the monthly increase in CPI would have been zero, and the yearly number in Feb would have been around 7.5 percent.
The whole point is to depict that by taking seasonality out, true inflation might be low. And do not confuse it with recent Indo-Pak tensions, as tomato prices started moving north much earlier. This can be asserted from the fact that in week ending 28th Feb, on weekly basis, tomato prices have actually come down. Supply from Larkana farmers may create a glut by April, and tomato prices may nosedive to lower the overall CPI.
An easier way to understand that the Feb CPI increase has less to do any with other factor (such as currency adjustment) is by comparing headline inflation with core inflation. CPI increased from 7.2 percent in Jan to 8.2 percent while in case of core inflation, it inched up from 8.7 to 8.8 percent and the trimmed core remained unchanged at 7.7 percent.
By April, the core inflation may have a bigger decline than the CPI as house rent index base effect may normalize. Anecdotal evidence suggests that house rent is actually on a decline, and the real estate prices are coming down. Businesses are slowing down, it is surely lowering the commercial properties rents and that might be correlated to the house rent index.
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