At least that’s what the central bank would have you do! Monday’s monetary policy statement claimed that “the momentum in inflation has slowed, with month-on-month inflation flat in December [2021]”. Buoyed by this slowdown, the Monetary Policy Committee (MPC) found confidence to hit brakes on the fledgling tightening cycle that began few months earlier. But is inflationary pressure truly easing?
As commentators have already pointed out, it is curious that the MPC would draw such conclusion based on CPI figure of just one month. The cult of SBP’s faithful would have us believe that the bank has access to more data points than the analysts, and thus is justified to make this call. While the conviction of these true devotees is laudable, the doubting Thomases can’t help but put the claim to test.
Turns out, the month-on-month slowdown in Dec-21 CPI is almost fully explained away by fall in perishable sub-index, with all other major components such as housing, utilities, clothing & footwear, transport, education, restaurants & hotels, etc recording a month-on-month rise. And that’s not out of ordinary; the seasonal decline in CPI during December is a well-established phenomenon, attributable to arrival of fresh winter crop of vegetables and fruits.
The perishable food items sub index in the CPI basket consists of fresh fruits, potatoes, onions, tomatoes, other fresh vegetables, and ice cream, which together carry a weight of 4.99 percent in the N-CPI (4.46 in Urban, and 5.79 in Rural CPI, respectively). Historic trend (since at least 2011) indicates that the perishable sub-index declines month-on-month (MoM) every December, pulling down General CPI with it.
But onions and tomatoes alone don’t explain why MoM December CPI usually ends in red. December is also when the sugarcane crushing cycle goes into full swing. Similarly, poultry prices also witness seasonal decline around calendar year end, as consumption shifts away to other proteins temporarily. Together, these food commodities carry sufficient weight in national CPI – nearly 8 percent - to make December go easy on the consumers.
Unfortunately, history suggests that CPI’s December teaser is more fleeting than the romance of a summer love. Through no fault of SBP, lack of cold chain and storages for perishables means that vegetable/fruits prices swing back up, often more quickly than they come down; while sugar prices rarely taper off beyond April (unless of course there is a significant surplus ala 2017-18).
Be that as it may, MPC using decline in food prices as sign of inflation easing off more broadly is troublesome. It is hard enough to fathom that the esteemed forum is unaware of the seasonal cyclicality in food prices, let alone explain its complete disregard for Wholesale Price Index, which is rising at its fastest since at least July 2020, and is broadly considered a barometer for CPI on forward looking basis.
Since March 2021, YoY WPI has clocked in double-digit territory every month, at an ever-growing run rate. In fact, WPI for both Nov and Dec 2021 averaged above 26 percent, which makes things look worse than they did at the cusp of 2018-19 contractionary cycles. Naysayers may write off WPI movement to low base effect, but the month-on-month trajectory also offers little hope, averaging at 2.6 percent during Q2.
Going forward, any easing in month-on-month WPI and CPI can only come from what MPC fondly refers to as ‘administered prices’, that is, prices of fuel, gas, electricity and other utilities, where monetary policy transmission has little effect. The much-anticipated resumption of IMF program means administered prices may traverse further north, which raises further questions on the sustainability of ‘inflation slowdown’. A slowdown in international oil prices could be another ray of hope, but can monetary policy settings be truly pinned down to hopes and dreams?
From global commodity spiral and administered prices, to bumper wheat crop - a lot can go both right, and also very wrong, between now and June 2022. But even if lady luck fully takes Pakistan’s side and everything from Brent to wheat falls into place, will the success be attributable to the now forgone goal of ‘measured and gradual’ monetary adjustment of 2021?
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