The headline inflation came down from 9.4 percent in Mar19 to 8.8 percent in Apr19; the decline was expected as the high base effect due to mysteriously high recording of house rent index (3.1% quarterly increase) in last April is finally over. The core inflation - a better barometer of demand driven inflation, which peaked at 8.8 percent in Feb19 nosedived to 7 percent this month.
The problem at hand is the growing food inflation, which is pushing the CPI up. Within food, it’s the perishable products that is causing the damage - the sub-index moved up by a whopping 42.4 percent in the past four months, and it's not unique as prices fell down in previous two months (Nov-Dec18). Lack of cold supply chain in the agri produce markets is one of the prime reasons for the erratic price movement in short-life food items.
The recent untimely rains and thunder storms have done some damage to crops, and food inflation may remain under stress for the time being. The holy month is round the corner, and itis time for hoarding and artificial shortage in the land of pure. The previous government, especially Punjab, used to have strong administrative control in wholesale food market (mendis). The current regime does not seem to have that control, which is not good for essential food prices’ fate.
On the other hand, the government has not yet announced the support price of wheat, and that may create panic in wheat market; and in case of no price announcement, the farmers would be compelled to sell at discount. This probably would be good for checking inflation, but the farmer’s disposable income may fall to lower the rural economic demand.
That is the story of food prices. April is the month of recording house rent index - surveyed every third month. In Apr18, the house rent index increased by 3.1 percent over Jan18 recording. The market took that number with a pinch of salt as its hard to digest such high house rent price spike in days of falling real estate prices. This April, the increase is recorded at 1.3 percent, which is more realistic.
The other growing concern is the oil prices, which are heading into a dangerous zone. Brent from its low (monthly average) in Dec18, is slowly moving up, currently hovering over $70/barrel. That is stressing the transport inflation - up by 1.6 percent monthly, and 14.5 percent on a yearly basis in Apr19. OGRA has recommended around 15 percent increase in petroleum prices, which has been deferred for the time being. Expect a mechanism, under IMF, where the decision power of petroleum prices monthly change would be transferred to OGRA soon. If oil prices remain high, the fuel inflation will creep in, and that would adversely affect perishable food items prices further.
IMF conditions may bring inflation home anyways, such as pending revision in energy prices - electricity and gas. One cannot blame PTI government for it, as previous government did not pass the impact for years. Now the impact due to delayed, but inevitable, decision would be higher on inflation.
The other inflationary problem that IMF could bring is in the form of new taxes amounting to Rs600 billion or 1.4 percent of GDP - around 80 percent of it would be indirect in nature - such as increase in GST, higher custom duties on exempted items or withdrawal of other exemptions. In simple words, it's a tough year ahead.
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