KARACHI, June 15: Inflation measured by consumer price index (CPI) rose by an average 9.33 per cent during July-May 2004-05 up from 4.22 per cent in the same period of the last fiscal year.
But CPI inflation in May fell to 9.84 per cent on year from 11.1 per cent in April, data released by the Federal Bureau of Statistics show.
Analysts believe that full fiscal year inflation would reach 9.4 per cent against the initial target of five per cent mainly due to higher-than-targeted growth of the economy as well as due to policy lapses. In the last fiscal year, when the economy grew by 6.4 per cent, inflation stood around 4.6 per cent.
“Inflation in this fiscal year should close around 9.4 per cent,” says Mohammad Sohail who heads the research department of brokerage Jahangir Siddiqui Capital Markets.
Overall inflation fell to 9.84 per cent in May from 11.1 per cent in April as food inflation went down to 12.55 per cent from 15.7 per cent. This means that the government efforts to stabilize the prices of food items including wheat and wheat flour have started bearing fruits.
Food items have 40 per cent weightage in the CPI and as such an increase or decrease in their prices do have a huge impact on it. House rents that have 23 per cent weightage in the CPI recorded 12.05 per cent increase in a year to May, almost unchanged from 12.07 per cent in April.
Inflation rose faster than projected in eleven months of this fiscal year as mainly because the economy grew by an estimated 8.4 per cent during this fiscal year, against the target of 6.4 per cent.
But economists say policy lapses are also responsible for fuelling inflation. “(Higher-than-projected rise in) inflation is basically a governance issue,” says a noted independent economist Dr Asad Sayeed. “It has become a regulatory issue now,” he says referring to business malpractices like hoarding, speculative trading and cartel making amidst a seemingly loose check on such activities by the government.
Increase in prices of wheat and wheat flour and sugar offer examples of hoarding and cartel making while a boom in the real estate prices shows how speculation increases price levels.
Lately, the State Bank started tightening interest rates much faster than in the first three quarters of this fiscal year. On April 11 the central bank increased the discount rate to 9 per cent from 7.5 per cent after 28 long months and then increased the yields on treasury bills aggressively.
But independent economists continue to charge that the central bank should have gone for an aggressive tightening of monetary policy much earlier to keep inflation under control.
“The SBP adopted a credit policy that transferred huge excess liquidity (available with the banks) to consumer loans. This is a major factor for demand side of the inflation,” says Dr Kaiser Bengali, an independent economist and a former head of Social
Policy & Development Centre — a well-reputed think tank. “So when Shaukat Aziz says that increased incomes have created demand is not correct. The demand has been generated through debt financing,” he adds.
“A large part of the bank financing went into speculative purchases of land (and that contributed to inflation).” In eleven months of this fiscal year banks offered Rs374 billion credit to the private sector beating the original target of Rs200 billion set for the full fiscal year and even exceeding the revised target of Rs350 billion.
Central bankers defend the policy of gradual hiking of interest rates in the first three quarters of this fiscal year saying that it was meant to check inflation while allowing space for a faster-than-estimated economic growth.
