Food inflation has receded significantly and is the major contributor towards the slowdown in CPI inflation, SBP said in its first quarterly report. According to the report the headline inflation number has been edging down consistently and core inflation, encouragingly, is following suit.
"Food inflation has receded considerably recently and been the major contributor towards the slowdown in inflation. However, commodities displaying double digit inflation have been above 50 percent since February 2011--an indication of the broad-based nature of inflation in the country", the report said.
Core inflation is likely to recede gradually if there are no supply shocks that reinforce inflationary expectations. However, the key risk here is the recent deterioration of the external account and the resulting pressures on rupee, which will increase input costs across the board, the report said. "Higher energy prices, which, combined with shortages of natural gas, will lead to a steady rise in overall costs. Consequently, it is believed that supply-side pressures on retail prices are unlikely to recede in the short-run" the report added.
Domestic food prices, however, are expected to remain stable, followed by bumper crop of wheat in the offing that will suppress grain prices; a surplus of sugar in the market and suppressed international agriculture prices that will reduce exports and smuggling, thus shoring up domestic supply, it said. Going forward, SBP expects that food prices would remain stable on monthly basis and end year average inflation is likely to fall close to 12.0 percent.