ISLAMABAD: With weekly and monthly price indicators already showing record annual increases, the finance ministry on Friday forecast inflation to rise further due to a second-round effect of policy decisions made earlier to raise energy and fuel prices, the central bank’s policy rate, and the rupee’s depreciation to secure IMF funding.

“Inflation may further jack up as a result of a second-round effect,” the ministry said in its Monthly Economic Update & Outlook, adding that the recent political and economic uncertainties were causing inflationary expectations upwards.

The short-term rate of inflation measured by the Sensitive Price Indicator (SPI) last week hit a record 46.65pc, while monthly inflation recorded by the Consumer Price Index (CPI) reached 31.6pc in Febr­uary — the highest in six decades.

However, the SPI has slightly eased to 45.36pc in the latest reading released on Friday. The CPI reading for March is expected shortly.

The ministry explained that inflation was expected to stay at an elevated level owing to market frictions caused by relative demand and supply gap of essential items, exchange rate depreciation and recent upward adjustment of administered prices of petrol and diesel.

Also, due to the lagged effect of floods, the production losses have not yet been fully recovered, especially those of major agricultural crops.

“Consequently, the shortage of essen­tial items has emerged and persisted,” it said, adding that “another potential reason for rising price level is the political and economic uncertainty”.

Moreover, the economic distress resulting from the delay of the stabilisation programme has exacerbated the economic uncertainty, due to which inflationary expectations have remained strong.

The Economic Adviser’s Wing of the finance ministry also conceded ineffective policy measures and the haplessness of the authorities in containing the inflationary spiral. “Despite SBP’s contractionary monetary policy, the inflationary expectations are not settling down,” it said and also tried to attribute the challenge to Ramazan-oriented demand pressures.

It warned that bulk buying during Ramazan might cause the demand-supply gap and result in escalation of essential items prices, although the government was alert to the situation and had already taken on board all provincial governments to ensure a smooth supply of essential items.

The report also warned that being largely dependent on prevailing climatic conditions, as witnessed last year, the delay in rains and early heatwave forecast by the Pakistan Met Office in April and May could adversely impact wheat production.

On a positive note, the report said that despite challenges and uncertainties, the economy was showing continuous signs of resilience as depicted through contained fiscal and current account deficits during the current fiscal year.

Published in Dawn, April 1st, 2023

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