Subdued inflation

High volatility in the perishable food prices sub index drove the monthly hike in consumer price index at 0.96 percent to register the yearly increase of 8.53 percent in March 14. Perishable food index after a decline of 33 percent in the previous three months was up by 11 percent in March owing to high vegetable prices. Non-perishable food items increased by One percent in June and due to its high weight significantly lowered the impact of perishable to make the overall food index to soar by 2.2 percent.
Nonetheless, core inflation both non-food non-energy (7.6%) and trimmed core (8.1%) are coming down and so are impervious of oscillating food prices. The appreciation of currency has a positive impact on transportation inflation which is down by 0.56 percent in March and the year-on-year increase stood at mere 3.8 percent. This is probably due to 2.2 percent decline in petroleum prices at the start of March.
Similarly, housing, water, electricity, gas and fuel sub index virtually remained at the levels of previous month as house rent index adjusts on quarterly basis while rest of utilities prices have not moved up to the liking of the IMF.
However, the IMF wants some adjustment in tariffs and government may have to listen to it as it may not meet NIR targets for June end. In order to get waiver, the government has to please the Fund by applying Gas Development Surcharge and adjusting electricity tariffs. IMF expects inflation for remaining four months (including March) at 10 percent and that is not possible without upward adjustment in tariffs.
But that may not happen as per our estimates and if any adjustment takes place it would not affect the CPI as PBS statisticians are expert in doctoring such adjustments. Nine-month CPI is at 8.6 percent and the full year average is expected to be between 8.5-9 percent and this is in line with SBPs revised projection of inflation to remain between 8.5-9 percent.
With inflation 1-1.5 percent below discount rate amidst some currency appreciation the case of easing monetary policy becomes strong for the SBP, which has in the past few years kept real interest rates in the vicinity of zero. But the Fund thinks otherwise and has emphasized in its latest country report to build reserves, and for that the interest rates have to remain high.