Rent & potatoes inflation shock

Business Recorder (BR) Research

Inflation numbers for April have shocked many. The hike in perishable food items prices and quarterly increase in housing rent index took the CPI to 9.2 percent beating the consensus estimates (8.2%) by a fair margin. This might have marginally changed the market participants’ expectations who invested heavily in PIBs in anticipation of lower interest rates in the upcoming monetary policy.

But it will be touch and go as far as monetary policy is concerned. Full year average inflation is still projected to be below 9 percent (10 months average: 8.7%). With discount rate at 10 percent, gross reserves $11 billion and currency stabilising – there is a rationale for SBP to even ease the rate. That said, the catch is in the Fund’s desire to keep interest rates high for stability in foreign exchange reserves and combating resurgence of inflationary pressures.

Interestingly, after sharp rupee appreciation in March, Dar and company were expecting lower inflation, but the numbers tell an entirely different story. A dive in the CPI sub indices reveal that the spike is in items which have nothing or less to do with rupee movement, and if any impact has to come, it would be visible in a due course of time. Yes, the inflationary expectations are lowering which is evident by the bankers’ tilt towards PIBs; with virtually nothing parked in short term T Bills.

Perishable food items are on an upward cyclic journey – it increased by 33 percent in the first five months followed by a decline of 34 percent in the next three months, having increased again by 30 percent in the last two months. This explains the month on month inflation increase of 1 and 1.7 percent respectively in March and April.

The government is trying its level best to manage the food prices. Last month’s culprit were potatoes and the government has levied a temporary tax on exports and eased the existing taxes and duties on imports of it. Hopefully, there will be some respite in potato prices shortly.

Apart from food items, quarterly revision in house rent inched up the inflation in April. PBS conducts house rent survey every three months and incorporates the change in the month of recording, hence the surge. The yearly increase in house rent stood at 8.6 percent (from Apr 13 to Apr 14) and that is very much in line with overall CPI.

In the coming two months, there would be no pressure from the house rent side. Potato prices are expected to cool down. Currency appreciation may start showing its cascading impact through lower imported goods and services prices. An accommodating monetary policy along with single digit inflation in FY15 may well be on the cards.