New CPI – new realities

The wait is over. The rebased CPI came with a good news of almost one percentage point reduction in CPI for August, as compared to old base, to stand at 10.64 percent (old base:11.6%). The rebasing has increased the CPI on new methodology, relative to old, between Jul-18 to Sep-18; and lower new inflation thereafter without any break; and the gap has widened in Jul-Aug FY19.

The PBS has revised the weights adjusting to new economic realities with higher weight being assigned to restaurants and hotels, clothing and footwear, health and miscellaneous good and services (including beauty salons). The decline in weights is mainly in housing and utilities, transportation and communications.

The other element of new methodology is that urban and rural inflation are now separately measured for informed decision making. In old methodology, 487 product prices were collected from 76 markets of 40 cities. The new base comprises of urban and rural CPI – urban covers 35 cities and 356 items; while 27 rural towns are covered for 244 items.         

The difference in Jul-Aug inflation is due to changing weights, and methodology in measuring a few items including electricity, other utilities and transportation. The PBS has released the CPI based on old methodology on its website while a press release has shown new weights and numbers for Jul and August.

A few items are now directly linked to international oil prices –for instance, electricity inflation is reportedly covering the fuel adjustment – earlier it was only on base tariff. The oil prices started increasing in Nov-16 and upward trend continued till Oct-18 – and that probably has increased the new base inflation in these years (detailed series is still awaited). The high base then is lowering today’s inflation relative to old method as well.

Thus based on this analogy, the expectation of depressed oil prices will directly lower the inflationary expectations. Since the new Governor is forward looking, the SBP must be reacting promptly in changing monetary stance – and may signal by a token 25 bps cut in September review.  Although, market is expecting status quo to continue for some time.

The house rent and utilities inflation is now 8.6 percent for Aug-19 versus 12.7 percent as per old methodology. That does not mean that the absolute increase is reduced to almost half, it rather owes to a dip in gas price, which has reduced the overall impact, since it carried the highest change in percentage terms, despite relatively smaller weight.

It remains to be seen whether the PBS has adopted weighted average methodology or not, but the revision in gas prices is surely much closer to reality, than previously, although, still not accurate. The electricity price change is also largely responsible for the dip in the sub-index inflation, although, more clarity is sought on the matter, as the new calculation shows a 0.79 percent year-on-year dip in electricity prices.

There is not much change in the weight of food items and the food inflation on new base is higher. Similarly, the fuel inflation is higher on new base – though its weight is now lower. This implies that due to high food and oil inflation, NFNE (core) inflation reduction would be more pronounced. However, due to base change, despite the low monthly urban increase, core inflation is slightly higher, according to new methodology in Jul and Aug. The core may remain higher for a few months and this may dilute the chances of any easing in this policy review.