KARACHI, Sept 13: Consumer inflation measured by Consumer Price Index or CPI went up by 9.25 per cent in August 2004 over August 2003 as prices of food and beverages that constitute 40 per cent of the 374-item CPI increased by 14.35 per cent.
See Chart for details. In August 2003 CPI inflation had risen by only 1.76 per cent.
During July-August 2004 CPI inflation showed a year-on-year increase of 9.29pc. In July-August 2003 the year-on-year increase in the CPI inflation was only 1.58 per cent.
The numbers released by the Federal Bureau of Statistics on Monday strengthen the view that CPI inflation during this full fiscal year ending in June 2005 will be much higher than the targeted five per cent.
The government is yet to come up with a revised target for inflation but key indicators point to the possibility that it can reach 6-7 per cent. One of them is that the State Bank has little room for making very aggressive increase in interest rates required to keep inflation at five per cent because that can dampen economic growth.
Pakistan has set an economic growth target of 6.6 per cent for this fiscal year up from an estimated 6.4 per cent actual growth in the last fiscal year. Another indicator is an inevitable increase in price line due to de-freezing of domestic oil prices.
The government may let domestic oil prices move in accordance with the global prices possibly from the next quarter. It had frozen domestic oil prices by reducing its Petroleum Development Levy petroleum products since May 1 2004, but government sources say the practice may be discontinued in the next quarter. In that event the increase in domestic oil prices would push inflation further up offsetting a possible dampening impact of imported wheat on food prices.
FBS data show that inflation measured by Sensitive Price Index or SPI shot up by 14.38 per cent in August 2004 and by 14.11 per cent in July-August 2004 over the same period of last year. SPI inflation had risen by only 1.63 per cent and 1.83 per cent respectively in August 2003 and July-August 2003 over a year-ago period.
The data further show that inflation measured by Wholesale Price Index (WPI) increased by 7.94 per cent in August 2004 and by 9.06 per cent in July-August 2004 over the same period of last year.
Whereas CPI inflation is seen largely as the main indicator for the increase in the general cost of living, SPI inflation can be termed as inflation for the poor and WPI inflation as inflation for businessmen given the specific nature of the two baskets of items.
A big 14.11 per cent increase in inflation measured through SPI covering 47 essential items of daily use means the poor is hit hardest by soaring inflation in Pakistan.
On the other hand, a 7.94 per cent WPI inflation lower than CPI inflation of 9.25 per cent indicates that the pace of increase in CPI inflation would slowdown in the months to come.
This seems so, because WPI inflation impacts on CPI inflation with a time lag. Even otherwise, CPI inflation may show slower rise in coming months due to a progressive increase in statistical base of the previous year.
And there is no denying the fact that increase in wheat supply to flour mills from local stocks as well as out of the imported consignment may dampen prices of wheat flour and its by-products which were mainly responsible for pushing up food inflation in the last fiscal year.
But the mere increase in wheat supply would have a very little impact on prices of wheat flour and its by-products if administrative steps are not taken to check hoarding or smuggling of wheat and manipulated price-hikes by the millers.
Much would also depend on how aggressively the State Bank increases interest rates and how effectively it contains growth of currency in circulation or money outside the banking system.
The central bank has been raising T-bills rates gradually - and that has been one of the factors responsible for a modest slowdown in inflation in August compared with July.
But now it will have to intensify this exercise to keep inflation in check. A 9.25 per cent year-on-year increase in CPI inflation in August is slightly lower than 9.33 per cent rise in July 2004.
