KARACHI, Dec 3: Unexpectedly high November inflation has changed dynamics of economy as high Consumer Price Index (CPI) would not help investment and savings in the country while negative real interest would force regulators to increase the policy interest rate, said market sources on Tuesday.

The real force behind the surging inflation was food prices, some analysts said the
government is yet to manage economy while supply and demand of food items is widely upset across the country.

Researchers and analysts said the November inflation was much higher than the market consensus that may lead to slower economic growth as higher inflation makes money costly, increases risk factor for lenders and reduces real interest rate as well as profits.

“While CPI inflation for November 2013 was broadly anticipated to head higher, numbers have overshot market outlook with CPI for the month reported sharply higher at 10.9 per cent year-on-year basis and 1.3pc month-on-month basis,” said JS report issued on Tuesday.

The upswing in November 2013 inflation was led by higher food prices, particularly higher perishable food prices in the aftermath of a prolonged transport strike in November.

“Food inflation for the month has come in at a 26-month high of 13pc,” said the report. It was also noted that depreciation of local currency also helped the inflation to get strength and further weaken the purchasing power of the currency. The local currency witnessed a deprecation of about 8pc since the beginning of new fiscal year 2014.

Due to this inflationary pressure, the State Bank has increased the interest rate twice to 10pc during this period. Analysts believe the current trend could further push inflation higher.

“The rise in inflation is triggered by food group, including wheat prices in addition to recent electricity tariff increase and rupee deprecation,” said Mohammad Sohail, CEO of Topline Securities.

The five-month average inflation is 8.8pc while it was 7.4pc during the corresponding period of last year.

Analysts said the 8.8pc is not very big number but the trend is alarming. The first quarter inflation was 8.1pc while the 2nd quarter (2 month) inflation is 10pc.

“The current upsurge in CPI is expected to further fuel up the discount rate in the upcoming monetary policy,” said a research report of InvestCap.

“With this current increase in CPI, we expect SBP’s stance of monetary tightening to continue in the upcoming Monetary Policy.

“Moreover, negative Real Interest Rate (RIR) at -0.90pc in Nov-13 also indicates a further upsurge in discount rate to keep RIR in the positive zone,” said the report.

The new government is facing wide range of serious problems but the price hike has quickly damaged its reputation as ‘the government with new hopes.’