March 2019 recorded highest CPI since Dec 2013, but that does not mean that inflation will hit double digit in April. Market was expecting around 8.8-9 percent in March. The culprit is food inflation - mainly perishable - which on monthly basis grew by 3.16 percent - highest since Sep 2010, and the SPI data is suggesting that the trend is reversing in April. There is no monetary policy mechanism which can counter the supply side short term price shocks.
Five items within the food basket- fresh vegetables, fresh fruits, chicken, onion and tomato, prices contributed 92 percent of food inflation in March. The price surveys are done in the second week of the month, based on SPI data, at that time, these prices were increasing. In the last two weeks, the prices of tomatoes and onion declined while in case of chicken, there is sight increase. SPI between second week of Feb and second week of Mar increased by 1.95 percent, while in the last two weeks of Mar, the SPI index fell by 0.6 percent.
If this trend continues, food inflation may be negative in April. Had food items such as wheat, sugar or milk increased, it would have been a concern as the impact of staple is long lasting. But there is no reason for any panic based on perishable items where short term factors create volatility. Nonetheless, with Ramadan in May, there could be resurgence of food inflation, but again, it would be a blip.
Barring food inflation, the numbers are as per expectations. The core inflation has changed its direction in March - NFNE after 13 months of continuous upward journey, eased last month. In January 2018, the core inflation was 5.2 percent and it reached 8.8 percent in Feb 19, and is down to 8.5 percent in Mar19. The trimmed core is still on the rise, but its direction is likely to change soon as well.
The big number coming next month is the house rent index. There is a mystery in its calculation (read “CPI -unfolding house rent index mystery”). The data is revised every quarter - Jan, Apr, Jul and Oct. The irony is that the real estate market is visibly weak in the past two years, but the quarterly house rent index increased at five years high in the last 12 months.
Earlier in FY15 and FY16, when the real estate prices were growing substantially, the house rent index was not showing the increase - in FY16 it was lowest since FY04. At that time, this column repeatedly said that house rent was not rightly computed and now when the real estate prices are going south, house rent index is shooting.
It is supposed to be the most important indicator for monetary policy computation as it is the second biggest item in CPI [weight 21.8%] and in core inflation it is the biggest. When there are doubts in CPI computation, how can the monetary policy decision based on these numbers, be optimal. When there was a need for tightening - in FY16-17, SBP did not do as real estate bubble was not reflecting in CPI. And now when the house rent pressure is supposed to be easing, the tightening is at full throttle.
The learning should be for SBP and PBS to probe into past numbers and correct if there is any discrepancy. Anyhow, in April, the increase in petroleum prices, may contribute 0.15-0.18 as its weight in CPI is 3.0 percent and it is up by 5-6 percent this month. Nobody knows how the house rent is going to be computed in April, and if there is no abnormal increase, the CPI may stand between 8-8.5 percent in April.
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