The State Bank of Pakistan (SBP) on Friday in its first Quarterly Report for FY 2006 projected that the most realistic measure of inflation, the Consumer Price Index (CPI), will remain within the range of 7.5 to 8.5 percent by the end June 2006.
It is worth mentioning that the government has set the inflation target for FY 2006 at 8 percent. The Bank said: "There is a strong expectation that CPI inflation will remain at the level of 8 percent, which is in line with the annual target (end June 2006)".
The first quarterly report (July-September) states that inflation was declining. However, it needed to be reduced further even at the cost of sacrificing some growth in the short term.
It adds that this is essential, as downward trend in inflation will allow for an easing of monetary policy, thereby supporting long-term growth and countering any cyclical downtrend.
Giving the overview of inflation, the report says that inflationary pressures that started weakening by ast quarter of FY05, further weakened during the first five months of FY06. CPI and SPI inflation (YoY) witnessed obvious slowdown during FY06, on the back of a sharp deceleration in food inflation.
While, in contrast, Wholesale Price Index (WPI) inflation exhibited a steep rising trend until September 2005 due to the rising POL prices. However, this too showed some signs of easing during October-November 2005 mainly on account of softening in food and fuel and lighting sub-group inflation.
Exhibiting CPI trend, it says that inflation especially after rising from 8.7 percent in October 2004, marginal (YoY) CPI inflation peaked in April 2005 before dropping to 7.9 percent by November 2005.
While the earlier rise was dominated by rising food inflation, during the first five months of FY 06 inflationary pressures were being driven principally from the CPI non-food group since mid-April 2005.
In fact, the impact of a gradual deceleration in food inflation is partially offset by a sharp rise in the prices of key fuels. The rise in oil prices also led to a significant rise in transportation costs, thus supporting inflationary pressures to sustain.
On the positive side, a continued deceleration in house rent index (HRI) augmented the ease in food inflation during July-November 2005.
The income group-wise inflation shows that as a result of the weakening inflationary pressures in the CPI food inflation, the higher income group has been recording relatively high inflation as compared to the other income groups during the initial four months of FY06.
Year on year inflation for the higher income group (above Rs 12,000 per month) was witnessed at about 9 percent during November 2005, while the remaining income groups (below Rs 12,000 per month) recorded below 8 percent during the same month.
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