The State Bank of Pakistan on Friday projected that average inflation to be in the range of 8.5 to 9.5 percent in FY14. SBP in its first quarterly report, issued on February 28, 2014, was expecting CPI inflation in double digit (10-11 percent) end of this fiscal year; however now in its second quarterly report, SBP has revised it estimates as inflationary pressure is weakening and projects single digit inflation in FY14.
According to its report, some of the factors driving inflation in the first half of FY14 have started to ease. The pressure on PKR has eased, while perishable food items and global commodity prices should add to the muted inflation outlook. Furthermore, the latest "SBP-IBA Consumer Confidence and Inflation Expectations Survey" suggests softening of inflationary expectations on account of stability in administered prices, in particular retail oil prices, and PKR against US Dollar.
The stability in food inflation pulled down headline YoY inflation to 7.9 percent in January 2014, from 9.2 percent in December 2013. Based on these factors, SBP projects inflation to fall in the range of 8.5 to 9.5 percent during FY14. "There are, however, risks that the government may announce an increase in gas tariffs, which had been anticipated in January 2014. The needed upward revision in gas tariffs would put pressure on inflation, as household gas tariffs figure prominently in the CPI basket," SBP said.
Headline YoY inflation, which had been increasing since early FY14, entered double digits in November 2013, before softening to 9.2 percent in December 2013. This increase in the inflationary pressures during H1-FY14 can be traced to: (i) excessive volatility in perishable food prices due to supply constraints; (ii) a sharp increase in the price of wheat and its related products; (iii) increase in GST rate; and (iv) the reduction in subsidies on fuel and electricity, which pushed up administered prices of energy, the report said. According SBP inflationary pressures have weakened since December 2013, as the prices of perishable food items retreated after an ease in supply constraints and with the arrival of fresh crops, month-on-month prices of perishable food items declined by 25.6 percent in December 2013.
Furthermore, the pressures on PKR parity have also eased since December 2013, and the government is trying to reduce its inflationary borrowing from SBP. Hence, average inflation for the year is likely to fall in the range of 8.5 to 9.5 percent, the report said.