No respite from inflation

Much to the fear of economic managers, food inflation has come back to haunt consumers as it registered a month-on-month increase of 2.21 percent while posting a 20.54 percent year-on-year jump in November. Signs of the second round of inflation have become visible from a sudden hike in the low-weight consumer and medicare sub-indices.
Apparently, the impact of the steady tightening cycle, started in August, has not yet started to impact demand despite the 150 basis point hike in the discount rate since then. Empirically, the tapering of inflation happens six to eighteen months after the hike in policy rate.
However, the governments continued reliance on central bank borrowing and the northward global commodity prices journey may undermine the impact of monetary tightening. Oil prices, which in November were 15 percent higher than the average of preceding five months, are stoking imported inflation.
The recent populist measure adopted by the PPP-led government to not pass the impact of oil prices on local petroleum products, by adjusting petroleum levy and downstream players margins, may not be repeated in the coming months owing to fiscal constraints. Since the price of crude oil is 5 percent higher than November on average, a fuel price hike at home is on the cards.
Bear in mind that the hike in petroleum products in the previous months, and demand generation by high-powered money creation is fueling some sub-segments of non-food-non-oil prices - cleaning, laundry & personal appearance, and medicare indices increased by 2.3 and 5.3 percent respectively, in November over the previous month.
However, the heavyweight in core inflation - the house rent index - is on a constant decline since the start of the fiscal year and was at 6.9 percent (YoY) versus 15.05 percent in the corresponding period last year. It is feared that the impact of the second round of inflation could start reflecting in the house rent index in the second half of this fiscal year. Given the recent upward movement in construction material prices, its safe to assume that housing rent index bottomed out last month.
The impact of RGST, if implemented, rationalisation of electricity tariffs, rising crude oil prices, and the governments borrowing from the central bank are likely to push core inflation back to double digits from its range of 9.3-9.8 percent seen in the last four months. The trimmed core inflation, which has crossed 13 percent in November after 15 months, also suggests upward movement in core in the coming months.
Some other trend indictors are not healthy either. CPIs 12-month moving average which persistently declined for the whole of FY10 is on a constant rise ever since the start of this fiscal year and reached 13.44 percent in November from 11.71 percent in June.
Nonetheless food inflation which increased by 14.8 percent in the last five months might be subdued in the remaining part of the fiscal year. The expected bumper crops in the Rabi season and better supply conditions will come to the rescue of the food index. The 1.86 percent decline in the SPI (combined income) also suggests that food inflation might well be in the negative during December.
However, the low base affect would, even at no monthly increase in CPI, keep the CPI index at 16 percent - higher than Novembers headline inflation of 15.48 percent. This might force the central bank to continue pressing the monetary tightening button.