Inflation accelerates to 4.12% in July

Price reading comes after the SBP kept key policy rate unchanged. PHOTO: FILE

Price reading comes after the SBP kept key policy rate unchanged. PHOTO: FILE

ISLAMABAD: Prices of goods jumped almost one percentage point in July due to a sudden spike in food prices, pushing the key inflation indicator to above 4.1% on a year-on-year basis.

Inflation measured by the Consumer Price Index (CPI) – which captures prices of 481 commodities in urban centres – rose 4.12% in July compared to the same month of previous year, said the Pakistan Bureau of Statistics (PBS) on Monday.

There was almost one-percentage-point increase in the index, suggesting a moderate acceleration in prices due to various shocks.

The inflation numbers came out a couple of days after the State Bank of Pakistan’s decision to keep the key policy rate – at which it lends to commercial banks – unchanged at 5.75% for the next two months. The central bank followed the International Monetary Fund (IMF)’s advice to adopt a “prudent monetary policy”.

The government on Monday also cut the savings rate on various schemes in the range of 0.20% to 0.48%, indicating a reduction in the overall borrowing costs and signalling that it still expected a lower inflation in the new fiscal year.

Savings rates

The Directorate of National Savings cut the profit rate on Defence Saving Certificates by 0.37% to 7.33%. On the Special Savings Certficates, it cut the profit rate by 0.20% to 5.80% and on the Behbood Savings Certificates by 0.48% to 9.12% – the highest reduction. The profit rate on the Regular Income Savings Certificates was reduced by 0.24% to 6.31%.

The profit rates went down after the yield on Pakistan Investment Bonds (PIBs) fell by 0.38% in the last two auctions. The government raised Rs276 billion through PIBs in the two auctions.

The IMF had recently advised Pakistan that in the light of an expected moderate increase in inflation and tighter global financial conditions, maintaining a prudent monetary policy by targeting the clearly positive real interest rates and setting the policy rate in a forward-looking fashion would be important to preserve achievements in anchoring the low inflation expectations and support the stable financial conditions.

The IMF’s advice came after Pakistan closed the last fiscal year at a 47-year low inflation level.

The SBP’s recent policy statement also suggested a cautious approach going forward. The central bank said the increased economic activity might impact inflation and forecast the average CPI inflation in the range of 4.5% to 5.5% in the current fiscal year.

It also said any upward adjustment in gas tariff, fiscal slippages and supply disruptions posed a risk to this assessment. Uncertain global oil prices are a major risk to this projection.

In addition to the sluggish global demand, possible dampening impact of Brexit on global commodity prices and difficulties in clearing the excess domestic food stock also pose a risk to the inflation forecast.

The SBP inflation forecast is below the government’s target of 6% for fiscal year 2016-17. The IMF has projected 5.2% inflation for the year.

Food inflation

The July inflation rose primarily because of increase in prices of food items. The food inflation increased to 4.7%, up from June’s 2.3%, suggesting a steep rise.

Tomato prices showed an alarming 92% hike last month, followed by about 30% increase in prices of fresh vegetables. Prices of potato – another essential kitchen item – increased almost 18%.

The fuel and food-adjusted inflation, known as core inflation, fell marginally in July to 4.5% year-on-year.

Independent experts give more importance to the core inflation, which excludes the food and energy prices, which are susceptible to seasonal price shocks.

On a year-on-year basis, gas prices increased by almost one-tenth while water supply charges went up by about 9%.

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