ISLAMABAD, Aug 22: Core inflation (non-food, non-energy) exhibited declining trend as it stood at 5.2 per cent in the first month of current fiscal year (July 2007) as against 7 per cent in the corresponding month of last year.

Tight monetary policy pursued by the central bank is mainly responsible for this decline in core inflation, said an official report of the finance ministry released on Wednesday.

The annual core inflation during the year 2006-07 was 5.6 per cent as against 8.6 per cent in the previous year mainly because of the central bank tight monetary policy.

The first month of the current fiscal year has started with a positive note as the overall CPI-based inflation declined to 6.4 per cent in July, 2007 as against 7.6 per cent in the corresponding month of last year (July 2006).When viewed in the long term perspective; this month’s inflation is the lowest in the last four years.

The decline in overall inflation in July, 2007 is largely attributed to a sharp reduction in non-food inflation, which declined from 7.8 per cent in July, 2006 to 4.9 per cent in July, 2007.

Food inflation, on the other hand, has shown a marked increase as it was 7.4 per cent in July, 2006, which has increased to 8.5 per cent in July, 2007. However, as compared with previous month (June 2007) food inflation has declined considerably to 8.5 per cent as against 9.7 per cent in the previous month.

During 2006-07, average inflation stood at 7.8 per cent as compared to 7.9 per cent last year. Core inflation declined significantly to 5.6 per cent as compared to 8.6 per cent and non-food inflation averaged 6 per cent during 2006-07 as against an average of 8.6 per cent in the same period last year.

Food inflation on the other hand witnessed increase during the said period. It was 10.3 per cent in 2006-07 as against 6.9 per cent in the same period last year. It is clear that last year’s inflation was driven by higher food inflation as opposed to previous year where the major culprit was non-food inflation.

Last year’s (2006-07) food inflation has been fuelled by a combination of global trends in the prices of several commodities and the local supply demand driven factors.

Globally, higher prices of edible oil (palm oil and soybean) and dependency on their imports transmitted higher international prices to domestic market price.

Shortfall in domestic production of pulses, rice, chillies, other vegetable items (onion, tomato, etc.) and fruits also contributed to the rise in domestic food prices.

There are a few key food items, which are widely consumed and whose prices remained high during the year and, therefore, contributed to the pick-up in food inflation. These items include: rice, masur and gram pulses, milk powder, vegetable ghee, and cooking oil, red chillies, onions and tomato.

On the other hand, the prices of some essential food items were lower in 2006-07 as compared with last year.

These items include moong pulse, sugar, chicken, potato etc. The next year (2007-08) inflation target has been set at 6.5 per cent and the current inflation figures suggest that this target will most probably be met, added the report.