January inflation in check

Consumer price index increased by 0.21 percent in January to take the yearly increase at 3.32 percent - fourth consecutive month of inflations upward journey as it bottomed out at 1.32 percent in September 2015. Inflation in all likelihood will be north of 4 percent in February and March before it comes down in the fourth quarter - the full year average inflation may remain around 3 percent; lower than 4.54 percent in FY15.
In January, food prices plummeted and analysts were expecting monthly headline number to be in negative zone on monthly basis; nonetheless higher house rent index which is recorded on quarterly basis negated the impact of lower perishable food prices. The food group inflation is down by 0.72 percent on monthly basis while on yearly basis the number is up by a mere 1.21 percent.
Within food, the heavy weight non-perishable items recorded an increase of 0.46 percent from Decembers number but the fall in perishable items more than offset - it fell by 8.04 percent over the last months sub index. Commodities like tomatoes, potatoes and onions nosedived to become dirt cheap. Its a cyclical fall but the direction of the median is surely southward.
Bad news for smokers and drinkers as higher duties on these discouraging goods are hurting the overall inflation - prices are up by 0.74 percent over the last month and on yearly basis the increase is 26.45 percent which despite its meager weight of 1.41 percent in CPI basket contributed 0.51 percent in yearly CPI of 3.32 percent.
The major damage is done by housing, water, electricity, gas and fuels sub index which constitutes 29.41 percent of the basket and has the lions share in core inflation - its recording is inflated in January because of PBS methodology of measuring the house rent index once in a quarter and the impact is visible in only that month.
The house rent index increased by 2.03 percent over the last month (Dec) which affectively means that house rents are increased by 2.03 percent from Oct15 to Jan 16 and 5.46 percent from Jan15 to Jan 16. In Jul-Oct period, the house rent index was increased by 1.17 percent. The house rents have inflated more lately while the property prices remained subdued in the last quarter and the increase in construction related material and wages are proportionately less. This might imply that rental yield which is too low in Pakistan is probably on the rise; however without detailed scrutiny the trend cannot be ascertained.
Whatever the reason, house rent index will remain unchanged in February and March and with its weight of 21.81 percent in overall CPI, the headline number will be tamed. The transportation index increased by 0.15 percent in January as compared to previous month and 1.80 percent on yearly basis. This index will exhibit decline in February owing to downward revision in fuel prices for February. This will help CPI to remain tamed.
In case of food, the trend in last two weeks of SPI suggests that the food prices remained depressed after the recording of food inflation numbers for January (in the second week of the month). Given, low food prices, fall in fuel prices and unchanged house rent index, CPI for February may remain low on monthly basis and yearly number may hover around 4.5 percent.
The low base affect is increasing the yearly inflation number despite low monthly recordings and based on the fact that CPI has bottomed out and the pressures from demand side are visible - lately up tick in private credit off take and high real monetary expansion, the recent decision of keeping monetary policy unchanged is the right step.
The trend in core inflation also supports cautious monetary policy stance - both non food non energy and trimmed core inflation were up on yearly basis in January to stand at 4.3 and 3.0 percent respectively and may likely go further up in coming months. Thus based on inflationary trend, balance of payment situation and overvalued currency, the monetary policy easing may have bottomed out and in second half of 2016 the rates may go up slightly.