Inflation spikes 4.6% in Dec 2017, hits 8-month high

ISLAMABAD: For the first time in the past eight months, the inflation rate spiked 4.6%, showing the effect of government’s policies including the increase in prices of petroleum products for end-consumers and levy of regulatory duty.

“The impact of government’s decision to devalue the rupee against the US dollar by about 7.2% is also expected to appear after a lag of a couple of months,” said State Bank of Pakistan (SBP) Governor Tariq Bajwa.

Measured by the Consumer Price Index (CPI), the inflation increased 4.57% in December 2017 against 4% a month earlier, reported the Pakistan Bureau of Statistics (PBS) on Monday.

The increase of over half a percentage point in a single month reflects the impact of the revision in government’s administrative policies. The inflation rate was the highest since April 2017 when it had been recorded at 4.8%.

Prices went up both in food and non-food categories. Prices of those non-food items that had largely remained stable except for the cost of health care and education also increased after the government started enhancing petroleum product rates.

November 2017: Inflation rises 4% due to hike in both food and non-food prices

Other major reason was the imposition of regulatory duty on hundreds of tariff lines to rein in imports of “non-essential goods”.

Owing to the pick-up in December’s inflation rate, average inflation in the first half of current fiscal year (July-December 2017) rose 3.8%.

On a year-on-year basis, the non-food non-energy inflation, called core inflation, remained stable at 5.5% in December.

Among 89 commodity groups under the CPI, the core inflation covers price movements of 43 items. The central bank uses core inflation while formulating its monetary policy. The core inflation is a quarter percentage point lower than SBP’s key policy rate.

Although in its last report on the state of economy the central bank has said that the government will meet its 6% inflation target for the current fiscal year, the target is expected to come under pressure from the levy of regulatory duty and a significant increase in petroleum prices. The rupee devaluation will also have its impact soon.

Food price stability slows down pace of inflation

The extent of price increase due to devaluation and regulatory duty can be gauged from the Federal Board of Revenue’s (FBR) estimates to collect an extra Rs75 to Rs80 billion in revenues in the next six months due to these two factors.

However, independent economists say the overall inflation rate will remain in single digit in the short term.

The PBS inflation bulletin showed that on a yearly basis, onion prices increased 130.4%, tomato prices almost 50%, government university fee 37.7%, government engineering fee around 33% and government college fee almost 25%. Prices of chicken and potatoes jumped over 21%.

In December, gas cylinders became expensive by 17%, petrol by 15%, iron bar 14.2%, diesel 12.8% and kerosene oil 13.5%.

The government is increasing petroleum product prices, citing the rise in crude oil prices in the international market. Another reason behind the high prices was 30% general sales tax on diesel that the government from January 2018 reduced to 25.5%. Still, it is significantly higher than the standard 17% tax.

Overall, the rates of non-perishable food items increased 2.3% and perishable food items saw a surge of almost 23%. The cost of health services went up almost 11% in December over the same month of previous year.

Education cost increased 12.4% mainly due to increase in the fee of universities, colleges and schools.

Imports will become expensive, inflation will rise, pressure on forex reserves will ease

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