KARACHI, Aug 12: Consumer inflation i.e. inflation measured by Consumer Price Index rose by 9.33 per cent in July 2004 over July 2003 up from 8.45 per cent in June 2004.

The CPI inflation shot up in July primarily due to a fast rise in housing rents and items of food and beverages. Housing rents went up by 9 per cent in July 2004 over July 2003 and food and beverages prices shot up by 15 per cent.

Data compiled by the Federal Bureau of Statistics show that CPI inflation recorded a big rise of 1.38 per cent within one month i.e. in July 2004 over June 2004 up from 1.12 per cent in June.

Historical data showing month-wise year-on-year increase in inflation are not available. But the 9.33 per cent annual increase in CPI inflation in July is the highest if compared with average inflation numbers of the past seven years.

Though such a comparison may not reflect the actual trend in year-on-year movement of CPI it gives an idea of how fast inflation has risen in the first month of this fiscal year.

The CPI inflation was in double digits (11.8 per cent) back in 1996-97. Then it started receding and touched a historic low of 3.10 per cent in 2002-03 before rising again to 4.57 per cent in 2003-04.

Inflation rose by 4.57 per cent in the last fiscal year against the target of 3.9 per cent mainly due to higher economic growth and a dramatic rise in prices of food items because of wheat hoarding.

Availability of big volumes of money outside the banking system in the backdrop of historically low interest rates also had a hand in it. But the State Bank refrained from raising interest rates to help the economy grow by 6.4 per cent against the target of 5.3 per cent.

The 9.33 per cent inflation in July suggests that it would be too difficult for the economic managers to keep it at 5 per cent in the entire fiscal year 2004-05 over 2003-04. Pakistan has set inflation target at 5 per cent and economic growth target at 6.6 per cent for this fiscal year.

Though SBP has started a gradual tightening of its monetary policy to contain inflation many in the financial sector feel that the pace of tightening is too slow to keep inflation at 5 per cent in this fiscal year.

The monthly inflation of 1.38 per cent in July also suggests that there is much to be done by the economic managers to ensure that at the end of the fiscal year in June 2005 yearly inflation remains at 5 per cent.

Though a big increase in inflation in a single month does not necessarily mean that full year inflation would also remain high it certainly indicates that not much has been done in the past to keep inflation in check.

As yearly inflation shoots up to 9.33 per cent in July it does indicate that in the months to come people would face double- digit inflation. This seems all the more likely because there is not much room available for a fast-paced tightening of the monetary policy.

(In that case interest rates would rise abruptly and by big margins making it difficult to achieve the economic growth target of 6.6 per cent. A faster increase in interest rates would particularly hit the trade and industry resulting in lower than targeted growth in industrial production and exports).

Another thing that is bound to push inflation further up is the removal of the present cap on domestic prices of oil. The government has not allowed domestic oil prices to rise in response to soaring international prices since May 15, 2004 by reducing its petroleum development levy or PDL component of the local prices.

Once domestic oil prices are allowed to rise it would push inflation further up by directly increasing the cost of fuel/ energy and transportation and by indirectly raising the prices of almost all of the 374 goods and services in the CPI basket.