KARACHI, Aug 15: Inflation rose by 8.99pc year-on-year in July 2005 as the government measures taken to stabilize food prices failed because heavy rains and floods disrupted supplies of edibles.

Overall inflation increased by 8.99pc last month as the average prices of food and beverages in the 374-item consumer price index went up by 9.73pc. House rent rose even faster by 11.74pc, according to the data released by the Federal Bureau of Statistics on Monday.

Food and beverages and house rent combined make up around 64pc of the total CPI and as such an increase in the two has a big impact on inflation.

The FBS data show that the cost of transport and communication, which accounts for 7.3pc of the CPI, went up by 13.5pc year-on-year last month. This was obviously the consequence of the increase in transport fares announced in May due to rising oil prices.

In the last fiscal year ending in June 2005 inflation had risen by 9.28pc. Officials had attributed this to a faster-than-projected growth in the economy but independent economists had also cited mismanagement in supply of food items including wheat and a delayed and less-than-required response of the State Bank as key reasons for this. Pakistan’s GDP grew by an estimated 8.4pc in the last fiscal year, against the initial target of 6.6pc.

For the current fiscal year, the government has set the economic growth target at seven per cent whereas it has made a vow to keep inflation at eight per cent.

But the prospects for inflation remaining around eight per cent are challenged by the facts that international oil prices continue to rise, trade deficit is worsening and the central bank is reluctant to raise interest rates at the required pace to check unprecedented growth in private sector credit especially in inflation-inducing area of consumer finance. Besides, the rains and floods that hit Pakistan last month is bound to further aggravate the supplies of food items in the months to come.

And, the government has failed to check manipulative price hikes by both big businesses and retailers across Pakistan. Increase in the prices of sugar and cement can be cited as an example where cartel making and hoarding has taken a toll on inflation — and the government has not been able to check it effectively. Similarly, overcharging of customers by meat sellers offers a classic example of how the hopes for stabilizing prices through liberal imports fade when there are no effective administrative checks on retailers. Pakistan is importing live animals and beef from India but that has failed to bring down meat prices.

Private sector credit also continues to grow and since a significant chunk of it is going to consumer finance it continues to fuel inflation.

Data on private sector credit growth last month would be out after some time. But bankers say the private sector continues to show a big appetite for bank credit despite the interest rates tightening by the State Bank of Pakistan.

The policy makers have set private sector credit target at Rs330 billion for the current fiscal year.

In the last year, private sector’s borrowing from the banking system exceeded Rs390 billion for the first time in Pakistan’s history.

However, amidst a high inflation of 8.99pc last month, a positive development was that the increase in the SPI inflation was a bit lower — 8.04pc.