The inflation clocked in at minus 0.25 percent on monthly basis in February which is the second lowest and third time in red, for the monthly number in this fiscal to date. However, the low base effect distorted the index to make it the highest CPI number this fiscal year as for the first time CPI has crossed four percent to stand at 4.02 percent in February 2016. CPI was at 3.32 percent in January 16 and 3.24 percent in February 2016; while in the last twelve months, it has averaged (Mar15-Feb16) at 2.56 percent.
Core inflation (NFNE) inched up from 4.3 percent in January to 4.5 percent in February while 8MFY15 average is at 4.0 percent. Trimmed core is also on the rise as it increased from three percent in January to 3.6 percent in the outgoing month. Thus, the low base effect is hurting all indicators of inflation.
Falling prices of food and petroleum products are keeping inflation well in check. On average, the monthly increase for eight months is at a mere 0.13 percent while the yearly average stands at 2.47 percent in 8MFY16 as against 4.56 percent in FY15. Food index (34.8% weight) fell by 0.79 percent in February over the previous month and on yearly basis the increase is at 2.47 percent. The sharp decline in prices of perishable food items (2.24% over Jan16 and 0.11% over Feb16) is the chief reason for low inflation while non-perishable items are down by 0.58 percent on monthly basis.
Items such as chicken (down by 19.6%), potatoes (down by 11.8%), onions (down by 7.6%) and tomatoes (down by 7.1%) have driven food inflation southwards. In case of non-food items, petroleum products, transportation services, readymade garments and motor vehicle accessories fell considerably in the recently concluded month; thanks to low oil and cotton prices, and depreciation of Japanese yen against Pak rupee.
The transport index (7.2% weight) fell by 2.2 percent over the previous month while it is down by 0.1 percent on yearly basis. Within it, motor fuel fell by 4.2 percent due to lower petroleum product prices in February. In March, the fall in prices is even steeper and the transport index is likely to go further south on the back of this decline in the ongoing month.
Housing, water, electricity, gas & fuel index (29.4% weight) remained virtually unchanged in February as within it; the house-rent sub index (21.8% weight) quarterly survey was done in January and is unchanged in February.
For the Wholesale Price Index (WPI), inflation was recorded at negative 0.6 percent on monthly basis while it increased by 0.6 percent on yearly basis. The 8MFY16 average WPI is at minus 1.7 percent; it was minus 0.3 percent in FY15. WPI usually and intuitively determines the trend in retail prices. However, since FY15, this correlation seems to be missing. The distortion in this relationship calls for some sophisticated statistical analysis to establish reasons for deviation in the indices. Experts fear that some creative accounting practices are being adopted to lower the GDP deflator for which WPI is a proxy, to overestimate real GDP by lowering nominal GDP.
In case of the Sensitive Price Index, monthly inflation is down by 0.5 percent in February while on annual basis it is up by 3.6 percent. The combined SPI for the weeks ended 18th and 25th February is down by 0.22 percent over the respective previous weeks; which implies that CPI shall to remain subdued in March as well. CPI prices are mostly recorded in the second week of the month and SPI index is a proxy for CPI, especially for food prices. SPI for four weeks from third week of January to the second week of February averaged minus 0.2 percent and CPI was down by 0.25 percent in the recently concluded month.
Thus, full-year CPI inflation (FY16) is likely to remain around 2.5-3 percent which is lower than SBP's revised forecast of 3-4 percent and IMF's estimates of 3.7 percent. Real interest rates based on SBP's target policy rate of six percent, is at 3.5 percent (based on 8MFY15 average inflation) which could mean another round of easing in the upcoming Monetary Policy review. The secondary market yield curve suggests so as well. However, BR Research believes that there are demand-side inflationary pressures as broad money (M2) growth is picking up and lately, the government has also come back to the central bank's door for fiscal financing. The overvaluation of currency is also limiting SBP's options on further easing in its monetary policy.
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