The WPI measures changes in average ex-factory and wholesale prices of 425 items grouped into five broad categories. The categories include food items, raw materials, fuel, lighting and lubricants, manufacturing and building materials.
Since the WPI inflation does have an impact on 374-item basket of consumer price index (CPI) after some time, CPI inflation may remain high in the second half (Jan-June) of this fiscal year 2005-06. This seems likely also because during July-Dec 2005, the WPI inflation was driven mainly by higher energy prices and these are unlikely to fall substantially during Jan-June 2006. In fact, they may either move up during this period or remain static, depending upon whether domestic oil prices are increased or kept unchanged.
During July-Dec 2005, CPI inflation increased by 8.4 per cent against the full fiscal year target of eight per cent. Keeping it within the targeted level seems too difficult not only because of the possible lagged impact of a high WPI inflation but also due to other reasons.
The government’s efforts to contain food price inflation through supplementing local supplies with imports are yet to show results: the retail price of sugar, for example, is still hovering around Rs36 per kg.
And the government continues to borrow excessively from the State Bank for budgetary support, which has its own inflationary impact on the economy. Between July 1, 2005 and January 14, 2006, the federal government borrowed Rs145 billion from the State Bank.
Estimates vary on where inflation would finally reach at the end of the fiscal year. The government and the State Bank are trying to contain it to the targeted level of eight per cent through administrative measure as well as tightening of monetary policy. But indications are that it may hit nine per cent mark.
The State Bank does prepare a comprehensive report on inflation every month. The document called ‘inflation monitor’ provides insight into underlying reasons of inflationary pressures. It also gives a futuristic outlook on inflation. The inflation monitor for the month of December 2005 notes: “Rising food prices, accompanied with weak base of December 2004, resulted into a resurge in the year-on-year inflation,” recorded by all the three indices namely CPI, WPI and SPI (sensitive price index). The CPI inflation, after declining to 7.9 per cent in November 2005, surged to 8.5 per cent in December; WPI inflation only inched up from 10.9 to 11 per cent but SPI inflation rose sharply from 5.4 to 6.8 per cent.
“It was a sharp rise in food inflation that led to a rise in all the three price indices notably during December,” notes the SBP document. “The recent move is signalling that inflationary pressures in food prices are still present and thereby ask for some administrative measures from the government to contain inflation from any further rise in the months ahead.” The rise in price indices in December 2005 does not necessarily mean that the trend of gradual fall in inflation seen in September-November 2005 has reversed. But “it does call for caution in assuming success in containing inflation.”
The government is trying to check inflation but it needs to intensify its efforts. On a lighter note, one can say that the government really needs to do more to check inflation also because in Islamabad the inflation is much higher than in the rest of the country. According to the inflation monitor, the highest CPI inflation of 11.5 per cent was seen in Islamabad and the lowest of 5.5 per cent in Hyderabad in November 2005. (city-wise break-up of inflation for December is not available).
City-wise inflation in November 2005 is under:
Islamabad 11.5pc
Rawalpindi 10.3pc
Lahore 9.6pc
Peshawar 9.0pc
Quetta 6.0pc
Karachi 6.8pc