KARACHI, March 21: The State Bank’s second quarterly report released on Monday has established a link between increase in petroleum prices and soaring inflation. Quoting data from the Federal Bureau of Statistics, the report says the impact of essential food items on consumer inflation was 53 per cent in January 2005. That explains why containing the prices of essential food items is a must to check inflation.

The report further says that apart from higher prices of food items, increase in petroleum prices and house rents have also been responsible for pushing inflation up. The government, after keeping a lid on local prices of petroleum products between May and November 2004, started revising them upwards from mid-December 2004. This pushed up transport and communication sub-index of CPI by 7.2 per cent year-on-year in January 2005 compared with 3.7 per cent in January 2004. (Train and air fares rose by 7 per cent and 19 per cent respectively in January 2005).

Higher prices of petroleum products also had an impact on fuel and lighting sub-index of CPI as higher prices of kerosene led to increased demand for substitutes like firewood and cylinder gas.

Commenting on the impact of higher house rents on inflation, the SBP report says that whereas CPI inflation was at 8.5 per cent in January 2005, inflation minus HRI or House Rent Index was only 5.7 per cent. This was mainly because of the fact that HRI carries a huge weight of 23.43 per cent in CPI.

An unprecedented increase in the prices of real estate and cost of construction can be cited as a key reason for the rise in HRI. But, the SBP report laments that “the accuracy of HRI is unclear, as the house rents are not being measured directly by surveys.” Instead, the Federal Bureau of Statistics compiles this index using an indirect method, “incorporating construction costs prevailing in 35 urban centres of the country on the assumption that rental values move in parallel with construction costs.”

This indirect measurement is not in line with international data compilation standards and given the HRI’s huge weight in CPI “this raises the risk of policy errors.” An improvement in the computing methodology of HRI “would not only improve the credibility of CPI it would also provide sound basis for the conduct and formulation of effective policies,” says the report.

Commenting further, the SBP report says that “the producers of goods and wholesale traders in the country are benefiting from a relative decline in the prices of raw materials and food items respectively while the bulk of consumers are paying higher prices for buying their basket of daily consumable goods.” In plainer words, it means that wholesalers are not passing on the benefit of the fall in raw materials and food items thereby keeping inflation high.