KARACHI, Jan 13: Whereas general inflation fell to 8.81 per cent year-on-year for July-December 2004 from 9.10 per cent for July-November, non-food inflation went up, instead, to 6.24 per cent from 6.08 per cent.

Provisional data released by the State Bank reveal that whereas general inflation has recorded a gradual decline since August, non-food inflation has not - it has rather shown a measured increase. This, however, does not necessarily apply on inflation numbers for each month during the first half of this fiscal year, which is out of discussion here.

A gradual decline in general inflation since August - with the largest fall in the number for July-December - lends credence to the government's claim that the efforts to check inflation by improving food supplies have met with success.

That food inflation, in particular, has also been on the decline since August further strengthens this claim. Food inflation fell to 12.63 per cent year-on-year for July-December 2004 from 14.93 per cent for July-November. But still the government and the central bank have a long way to go to ensure that food inflation, 12.63 per cent for July-December 2004, falls to a single digit for this full fiscal year.

If they manage to keep food inflation in single digit, preferably not far higher than the last fiscal year's 6.01 per cent, it would lessen the burden of inflation on poorer people. A gradual rise in non-food inflation since August does indicate that the State Bank needs to tighten interest rates a little faster than it has so far done.

But inching up of non-food inflation does not mean that the tightening of interest rates since July has nothing to do with a gradual fall in general average inflation. It only points to the possibility that the SBP may not only have to continue tightening of interest rates but also to quicken the process.

Anticipating a rise in inflationary expectations, the State Bank had started increasing treasury bills rates back in February last year but it accelerated this exercise with the start of this fiscal year in July 2004.

In the first half of the current fiscal year, the SBP increased the weighted average yields on three-month, six-month and one-year treasury bills by 2.22, 1.66 and 2.24 percentage points respectively to 3.92pc, 3.73pc and 4.43pc.

Then early this month the SBP increased the average yield on six month bills by less than half a percentage point to 4.16 per cent. The SBP, however, still keeps its discount rate unchanged at November 2002 level of 7.5 per cent thus robbing it of its role as anchor of monetary policy.

To bring down non-food inflation that can roughly be interpreted as core inflation in Pakistan the central bank may now have to increase its discount rate also along with tightening of T-bills rates.

That would give a stronger signal to the financial market that the SBP means business when it says it is going to tighten interest rates. The SBP is due to announce its monetary policy stance for January-June 2005 next week and the possibility that it may hint at using other tools of tightening of monetary policy including discount rate cannot be overruled.

The government had initially set inflation target at 5 per cent for this fiscal year anticipating that the economy would grow by 6.6 per cent. The central bank said in its first quarterly report released late last month that inflation would finally rise by 7.6-8.2 per cent during this fiscal year and the economy may grow by 6.5-7.2 per cent.

During the last fiscal year when the economy grew by 6.4 per cent against initial projection of 5.7 per cent, the rise in inflation was 4.57 per cent, higher than the initial estimate of 3.9 per cent. This shows that the additional increase in inflation was in line with the additional growth in the economy.

The possibility of the same happening in this fiscal year seems a remote possibility. That is, the increase in inflation over the original target would be much higher than the increase in economic growth over and above the initial estimate.

Meanwhile, the government should see to it that its efforts to strengthen local supplies of staple commodities with imports have a meaningful effect on the price line.

This is all the more necessary not only to check overall inflation but also to keep food inflation in single digit, failure in which can nullify its efforts to reduce poverty. The government has so far imported a million tons of wheat and plans to import half a million tons more. It has also decided to import sugar and fertilizers.