The inflation dragon has started showing teeth, as it exhibited highest monthly jump since April 2016. Apparently, April has been a tough month for CPI ever since the re-basing of CPI; the monthly number remained north of 1 percent in April for seven consecutive years. High food inflation and quarterly recording of house rent explain relatively high inflation in April. 
Analysts were discounting this April phenomenon as consensus estimate of inflation was 3.9 percent. CPI on yearly basis stood at 4.8 percent in April, down from 4.9 percent in the previous month. The high base effect of last April has kept yearly inflation relatively tamed this April. But, the number would have its toll in coming two months of the fiscal year, as it may cross 5 percent in May which would be the highest monthly number since Oct14.
Food inflation increased by 2 percent on a monthly basis, followed by a similar jump of 1.9 percent in the previous month. The holy month of Ramadan is not far and it usually comes with high food inflation. Last year in June (Ramadan) and July (Eid) food prices had jumped by 1.4 percent and 2.5 percent respectively. The hike may not be of similar magnitude this time as the prices are already up before seasonal increase. But the prices fell considerably last winters and that has curtailed the yearly food inflation hike to 3.9 percent in April 2017.
The other heavy index is housing and utilities and it has increased by 1.1 percent over Mar17, while on yearly basis the index is up by 5.1 percent. The house rent index (CPI weight:22%) is recorded on quarterly basis and the sub-index increased by 1.5 percent in April. The yearly increase is approaching 7 percent. That is high, and it suggests that core inflation is under pressure.
The oil prices reversal is showing its impact on motor fuel which has increased by 10.8 percent over April 2016. That said, its impact is not fully reflecting in transport sector which is up by 4.4 percent. The IMF expects high oil prices to test the balance of payment of oil importing countries including Pakistan as the import bill would rise and so would the inflation, if the impact is fully passed on. Right now, government is passing most of the impact of hike to the consumers but it could all change close to elections, if the oil prices sharply move up.
The other goods and services that have become dearer are education (10.9%) and health (13.8%). That is not good for social uplift of poor and lower middle class. Government has to intervene to arrest the rising trend of prices in social sectors.
Overall inflation is likely to remain around 4.2-4.5 percent for FY17, as against 2.9 percent in the last year. But both demand side, owing to low interest rates, and supply side, due to reversal in commodity prices are building inflationary pressure. Core inflation has consistently remained higher than 5 percent since October 2016 and had inched up to 5.5 percent in April 2016. The trimmed core stood at 4.8 percent.
The 12 month moving average of CPI is currently at 3.9 percent as compared to 2.7 percent a year ago. Thus, all the indicators are for CPI to rise and it may hover around 5-6 percent in FY18. However, any external shock could adversely affect the equation.
The foreign exchange reserves are falling fast whilst current account deficit is widening. The fiscal deficit may deviate by at least 500 bps from its optimistic target of 3.8 percent of GDP. The currency would be under pressure and Dar may have to take the pill prior to the elections. Demand is growing and is based on domestic money growth which also suggests inflation is in the offing. Thus, keeping a cautious monetary stance should be the case in May’s review.
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