Record inflation!

Inflation is on a record-breaking spree. The headline number stood at 27.3 percent in August 2022– the highest since April 1975. This mammoth inflation is unprecedented for the majority. Based on many analysts' forecasts, the number was supposed to peak this month. However, now there might be some upward revision due to floods.

The food supply chain disruption will have an impact on food inflation. The government is thinking of significantly revising the wheat support price to help farmers, which could cascade into the inflation of all other food items. Then the staggering increase in electricity base tariffs and other adjustments to keep the pressure high. And the price of gas is yet to increase. Then the petroleum levy on petrol and diesel will go up too.

The month-on-month high increase is likely to stay for the next few months. The CPI basket price increase is 13.5 percent from the three months level. SBP expects the headline inflation to average 18-20 percent this fiscal year. However, that might be revised upwards. According to news reports, the ministry of finance's revised estimates is around 26 percent.

The immediate impact of the floods is on the perishable food items. All perishable items are grown this season on the left bank of the Indus River in Sindh. These are badly damaged. Prices of tomatoes and onions are skyrocketing. Some impact is visible this month (Tomato MoM increase is 53%). More to come next month – visible from the recent SPI increase.

Then the price of rice is likely to increase. There are huge losses of livestock in affected areas. There could be a pressure of an increase in red meat and poultry (chicken and eggs) prices. And if the government significantly increases the wheat support price, that would impact the price of animal feed and the growing of other crops. History suggests that overall food prices anchor on wheat and have a cascading inflationary impact.

The food inflation remained relatively controlled in August – a month-on-month increase is 1.4 percent, and a year-on-year increase is 29 percent. The flood round of inflation is to be on top of it. Urban food inflation yearly increases at 28.8 percent, while the rise in rural areas is 30.2 percent. Overall CPI increase is higher in rural areas at 28.8 percent vs. 26.2 percent in urban areas. And the impact of floods is higher in the rural community.

Inflation is not confined to food. The massive jump in the last three months is on the energy side. And yet the full impact is not being passed. The petroleum prices increase was the top item. Enough has been written on that. The increase will be due to taxation imposition while the international prices are falling, given that global oil prices do not spike. PKR does not slip again, and the increase in petroleum prices is limited. Transport inflation is marginally down monthly, and the yearly increase is 63 percent.

This month the increase in electricity prices is the top item – up by 19.7 percent in a month. The base tariff is increased by Rs7.91/unit. The pass-on is staggered over three months. The first increase is incorporated in August bills. The remaining two are in September and October. Then there are quarterly tariff and monthly fuel cost adjustments (FCA). FCA was high last month and even higher this month. This is likely to fall in September and October.

Then there could be a surprise increase in gas prices. Overall, the rise in house rent and utility sub-index is 5.5 percent on a monthly basis and 27.6 percent on a yearly basis. Then the impact of energy is passed on to many items. The core inflation is moving up too. The urban core is at 13.8 percent, while the rural core stands at 16.5 percent. Three months ago, the urban core was in the single digit. The trimmed core has already crossed 20 percent.

Inflation will remain high and economic growth will continue to suppress. The year is going to be a tough one.