The inflationary pressures are building up; the numbers are showing an expected but unwanted story. The CPI clocked at 5.84 percent in August 18, ensuring that PTI economic team does not have an easy pitch to bat on.

Just to give perspective, same month last year the headline inflation was mere 3.4 percent. However, Aug18 is no surprise as July numbers were 5.8 percent too. The subtle difference is that in July, quarterly house rent index was computed which jacked up the inflation number then whereas the case is absent in August.
The story is different this month as the impact of currency depreciation, higher fuel prices and unexplained high house rent index in the last two recordings (Apr18 and Jul8) have changed the base and anchored higher inflation for virtually one full year.

The other way to explain the high base effect is that on monthly basis, CPI inched up by a mere 0.2 percent but the yearly number is as high as 5.8 percent. In case of Aug17, the monthly increase was same as in Aug18; but the headline number was 240 basis points low at 3.4 percent.

Till last year, core inflation was low and depressed food prices never let the CPI grow to worry policymakers. Now the core inflation is becoming a problem. It is the fifth straight month, where core inflation is over 7 percent as it stood at 7.7 percent in Aug18. Time is not far when the core inflation crosses 8 percent while the trimmed core is fast approaching 6 percent.

The future is not rosy; as the wholesale price index which is an indicator of future retail prices is now in double digits for the second consecutive month. It reordered at 11 percent in Aug18 while in the same month last year the number was mere 0.7 percent. The inflation story has taken a complete 180 degree shift in twelve months.

Food prices did not shy from increasing in Aug18 as perishable food items increased by 3.15 percent over July18 while the yearly increase is below 3 percent explaining how depressed the prices were earlier. Overall food index increased by 0.2 percent on monthly basis which is aligned to CPI increase while on yearly basis, food is not a concern as the sub index recorded an increase of 3.3 percent.

The elephant in the room is transportation whose weight in the basket is 7.2 percent, but it is adversely impacting inflation across the board and will continue to do so in months to come.

The sub index increased by 1 percent on monthly basis and the yearly increase is a whopping 17.3 percent.

The way things are proceeding, by December inflation may cross 6.5 percent and the six month average may hover around 6 percent. And thereafter, BR Research model is predicting the headline number to cross physiological levels of 7 percent.

Without any further monetary tightening, the full year number in FY19 may hover around 6.5-7 percent. Mind you, if the currency is further depreciated, inflation could be even higher. The SBP should be closely watching this and may inch the policy rate further in September review.