Inflation down but watch out for the risks

It's good to see inflation tapering off since the start of this fiscal year, but a substantial fall in month-on-month price growth in September is an even pleasing sight. Monthly headline inflation grew just 0.45 percent last month - down from 1.7 percent in the previous month.
This lower than consensus estimates depicts the impact of lower oil prices and respite in non-perishable food prices - which eased by mid Ramazan, partly due to sugar price control measures. On the year-on-year basis, the CPI basket rolled on its downward trajectory to hit a 21-month low of 10.12 percent compared with 10.69 percent in the previous month.
Non-food and non-energy inflation also kept on its southward journey; however, its rate of deceleration was lower than overall price movement. Core inflation eased to 11.9 percent versus 12.6 percent in August whereas the trimmed core inflation was down by 70 bps to 11.9 percent last month.
With core inflation over 100 bps lower than the central bank's policy rate, there is a strong case, in isolation of other parameters, for a rate cut in next month's interim monetary policy review. However, fiscal slippages one the other end will not let the central bank to run monetary stimulus to be able to cater the need of excessive government borrowing from domestic sources as it also exerts inflationary pressure with sticky supply.
There are voices around the globe on economic recovery that build a case for spike in international commodity prices, especially crude oil. Although, these talks are challenged by some doom seers who expect global economy to slide again taking commodities with them, even a temporary surge in commodity prices can exert a severe cost-push inflationary pressure here at home. Albeit, not to the extent observed last year.
Moreover, the recent hike in electricity prices by 6 percent is also likely to inflate prices further in the coming months. This will be fuelled further by additional increase of 15 to 25 percent in electricity tariffs, as stipulated by the IMF, and installation of expensive rental power plants.
And if the Kerry Lugar is scrapped, Pakistan will have to knock on IMF doors again for fiscal support; ie more stringent fiscal conditions, possibly by further removal of subsidies. These possible scenarios, suggest the inflationary dragon isn't dead yet - it is just, perhaps, in the hiding - waiting to reappear if exogenous factors and/or fiscal pressures call the tune again.