Fall in the rate of inflation

The very good news is that there has been a precipitate drop in the rate of inflation, as measured by the Consumer Price Index (CPI) of the Pakistan Bureau of Statistics (PBS). Over the last twelve months, it has fallen from 29.2 percent in November 2023 to 11.2 percent by May 2024 to only 4.9 percent in November 2024. Such a spectacular drop in one year has never been seen before.

There is, however, some divergence in the rate of inflation according to different measures on a year-to-year basis in November 2024. The rate of inflation, according to the CPI, was somewhat higher for urban consumers at 5.2 percent, as compared to 4.3 percent for rural consumers.

The Sensitive Price Index (SPI) has shown a somewhat higher rate of inflation than the CPI at 7.3 percent. As opposed to this, the Wholesale Price Index (WPI) has registered a significantly lower rate of inflation of only 2.3 percent. All price level indicators are showing single-digit inflation since September 2024.

There is need to understand the reasons for the transition within one year from high double-digit inflation to low single-digit inflation. Also, it is essential to make an assessment of the sustainability of the very low rate of inflation.

The first analysis that is undertaken is to determine the pattern of decline in the rate of inflation in November 2023 at 29.2 percent to only 4.9 percent in November 2024. The commodity or service groups which have contributed more to the decline in the rate of inflation are listed in the table.

The biggest contribution to the decline in the rate of inflation has come from non-perishable items in the food and beverages group. This is a very positive outcome and implies that among the income quintiles in the population the biggest drop in the rate of inflation has probably been in the case of the bottom two quintiles.

Disaggregation further down to individual items, reveals that the major contributors to the fall in the rate of inflation in the food group are wheat flour, milk, rice, sugar and tea. The price of wheat flour has plummeted by 32.5 percent. This is due to the bumper crop and the failure of the procurement process. This is ominous as far as the next crop is concerned.

Within the house rent and utilities group, there is glaring example of the impact of gas prices. They rose by 520 percent last year and only 10 percent this year. This represents a very high base effect and alone has contributed to over 20 percent decline in the CPI rate of inflation. Within the transport group, the fall in price of motor fuel has also made a significant contribution. This is attributable to stability in international oil prices and some actual appreciation in the exchange rate after November 2023.

The fundamental question is what is the short-term outlook for the rate of inflation? The above factors contributing to the very low rate of inflation are likely to persist till April 2024. Thereafter, there is the likelihood of the beginnings of a low-base effect.

Further, the IMF review is scheduled for March 2025. This is critical from the viewpoint of inflationary expectations. If the review is not completed due to failure to meet some of the performance criteria and structural benchmarks, then risk perceptions are likely to rise sharply.

The consequence may be a further decline in external inflows and a likely fall in foreign exchange reserves. This will put pressure on the value of the rupee and put pressure on prices of imported items as we saw in 2022-23.

There may also be other factors contributing to higher inflation. If the circular debt continues to rise in the power sector, then a rise in electricity tariffs will have to be resorted to. Large and increasing shortfalls in FBR revenues may necessitate increases in indirect tax rates.

As the budget deficit spirals, there may be a corresponding increase in money supply.

The average rate of inflation in the first five months of 2024-25 is 7.9 percent. The IMF projects the average monthly average of the rate of inflation in 2024-25 at 9.5 percent. This implies that the average monthly rate of inflation from December 2024 to June 2025 is likely to be 10.6 percent. This is somewhat on the high side.

The prospects are that the inflation rate will average close to 8.5 percent in 2024-25. This implies an average rate of inflation from December 24 to June 25 of 8.9 percent. For the full year of 2024-25 there is likely to be an average single-digit rate of inflation of 8.4 percent.

Copyright Business Recorder, 2024