Pakistan faces high inflation despite historic lows in region

KARACHI - As inflationary pressures across the globe continue to dissipate, Pakistan still faces a very high double-digit inflation.
A regional comparison of inflation reveals the rigidity of inflation in Pakistan in comparison to other regional players. Except for Iran, all the countries have shown notable deceleration in their inflation rates from July 2008 to March 2009. Inflation in India is at historic low, whereas, Thailand has seen deflation during March 2009 from a high of 9.2 percent in July 2008.
Other countries like Philippines, Vietnam, and Sri Lanka witnessed substantial deceleration in inflation since December 2008.
In Pakistan, the Federal Bureau of Statistics has 17.19 percent inflation in April YoY. Most of the economists believed the price pressures are still not on ease, as highlighted from 1.4 percent MoM increase in March. Both, the WPI and SPI have also depicted a 1.68 percent month-over-month increase.
However, price stresses may ease on account of slackening demand pressures due to bumper wheat and minor crops.
Although all the price indices like the CPI including core inflation, WPI and SPI have shown a downward trend in recent months, the decline has been subject to stiff downward rigidity.
Ministry of Finances report titled Review of Economic Situation for the Period July-March 2008-09 projected the average inflation for the year (2008-09) close to 20 percent with end year inflation of around 11 percent. The most optimistic estimate for the next year inflation will be around 6 percent.
Report also pointed out that month-on-month increase in food and non-food inflation in the months of February and March has been especially disappointing.
The sugar and wheat have to play its role in inflationary environment in Pakistan in the final quarter of this fiscal year (April-June 2009). The dirty work of extra-market forces kept fruits of falling inflation away from Pakistans consumers.
Notwithstanding, difficult domestic environment, the inflation rate as measured by the changes in Consumer Price Index (CPI) showed an easing trend beginning in November 2008, touching 19.1 percent in March 2009 after reaching a record level of 25.5 percent in August 2008. While the food group was the major source of inflation in Pakistan during the first nine months of 2008-09, the non-food component of the CPI has also been persistently high, resulting in overall stubbornness of the inflation.
The CPI inflation averaged 23 percent during July-March 2008-09 as against 9.5 percent in the comparable period of last year.
Food inflation is estimated at 28 percent during July-March 2008-09 as against 13.8 percent in the comparable period of last year. Although food inflation has eased during the course of the current fiscal year, it remains painfully high and remained a major cause of concern. This can be attributed to the stubbornness in prices of some key commodities such as edible oil, pulses, rice, milk, sugar, poultry, meat, wheat, wheat flour, and fresh vegetables.
Non-food inflation stood at 19.2 percent, against 6.3 percent in the corresponding period of last year.
Non-food inflation has remained persistently around 18-20 percent throughout 2008-09 as the transport group, fuel and lighting group and house rent index have remained high. For instance, the downward adjustment of petroleum prices in the month of November is neutralised by frequent hikes in electricity and gas prices.
Core inflation, which represents the rate of increase in cost of goods and services excluding food and energy prices, also went up from 7.1 percent to 17.8 percent during this period. After hovering around the 18.9 percent mark since November 2008, core inflation came down slightly to 18.46 percent in March 2009. Notwithstanding, all monetary tightening during May 2007 to March 2009, core inflation had depicted its first deceleration since May 2007 in December 2008 but hovered around 18.9 percent up until February 2009.
The core inflation accounts for 51.01 percent weight in CPI index. This weight is broadly distributed among house rent index (23.43pc) and non-house rent index (27.58pc). Federal Bureau of Statistics compiles HRI 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.