Inflation expectations are being mismanaged. There are not much demand side inflationary pressures. Inflation is low worldwide and monetary easing is the case around - India recently cut interest rates by 25 bps, FED has eased the outlook, deflation is the case in Malaysia and the list goes on. But in Pakistan, key officials are building the inflationary expectations themselves. When everyone is talking inflation up, it actually could, even if the fundamentals are not supporting the argument.

Inflation is not a problem in this crisis - unlike in 2008. Food and house rent combined constitute three fifth of CPI, and there are fundamentals to support that these two items so far have remained insulated to currency depreciation. Plus, there are errors in computing gas prices increase impact on CPI. The actual impact of gas price revision on CPI should have been not more than 28 percent, instead of the faulty 85 percent computed by the PBS (see “CPI rationalized – now methodology’s turn” published Nov 16, 2019).

Back in Dec17, when the currency adjustment started, food commodity prices in Pakistan - wheat, sugar, milk etc were at premium to international prices while there was supply glut in both wheat and sugar. Provincial governments have to subsidize these commodities for exporting the surplus. That is why. despite steep currency adjustment, inflation is below 5 percent, on yearly basis, in these food items.

This is in stark contrast to 2008-09, when inflation topped at 25 percent as a result of similar currency adjustment. At that time, food prices in Pakistan were at a discount to international prices, prior to currency adjustment, and domestic prices responded to rupee devaluation. This section wrote about this phenomenon in December 2017, but till date, no one from SBP or MoF attempted to explain this to general public (see: 'impact of currency depreciation', published Dec 14, 2017).

https://www.brecorder.com/2017/12/14/386952/impact-of-currency-depreciation/

The second important element is house rent. It is a proxy of real estate prices and economic activities. If real estate prices are moving up, rents on houses spike up too. However, since Jul 2016, the real estate price increased is arrested and the case of house rents should not be any different. Then there are other reasons for house rent to be low as in cities like Islamabad and Karachi, court decisions to prohibit commercial activities in residential areas have actually lowered the rent in various localities. However, current house rent index is computed at 8.2 percent in last twelve month - at almost a five year high (see 'CPI -unfolding house rent index mystery' published May 3, 2018).

Now when March 2019 inflation hit 9.4 percent with food prices increasing by 3.16 percent and within it, five items contributing over 90 percent of the increase, government is finally reacting (see 'Inflation high but don't get panic' and 'Tamato-flation, not stagflation). The government is now looking to not only correct the errors, but also thinking to have administrative price control mechanism on essential food items, especially when Ramadan is approaching.

According to the FM, March CPI at 9.4 percent is at least 1.2 percent inflated as PBS is using faulty methodology. The PBS has serious capacity issues which are visible from recent gas price increase computation in CPI. Earlier, the computation was too high, but even revised numbers have room for improvement (read 'Inflation: PBS owes a correction' and 'High inflation; low common sense’). This has economic implications as interest rates are revised up to manage higher inflation, which may not actually be the case.