Inflationary pressures start retreating in Q2

[LahoreEstate]

KARACHI: Although the dis-inflationary process in Pakistan has proved to be relatively slow, the underlying inflationary pressures have started retreating from the second quarter, 2009 as all price indices including CPI, WPI and SPI, witnessed a clear downward trend in recent months.

Food inflation is likely to decelerate at a faster pace from April onwards when the impact of bumper wheat and rice crops is likely to translate into lower consumer prices.

This was unveiled in the second quarterly report of SBP released on Saturday by the Governor of the Central Bank, Syed Salim Raza. The relative slowdown in domestic inflation since September 2008 was mainly driven by the deceleration in domestic food inflation as exhibited by the food groups of both CPI and WPI. While WPI non-food inflation dropped in tandem with international commodity prices, CPI non-food inflation showed stubbornness up to February 2009.

The impact of continued tight monetary posture also yielded dividends in terms of a relative ease in core inflation numbers during the recent months.

It is important to note an up-tick in headline CPI inflation during February 2009, principally driven by a rise in food inflation, is not surprising. Generally, wheat prices' decline during February each year is due to pre-harvest seasonal impact. However, this year wheat prices did not decline as domestic prices are already aligned with the procurement price for FY09 wheat crop.

After showing a continuous acceleration since March 2008, CPI inflation on yearly basis started easing from November 2008 and reached 21.1 percent in February 2009 as against a peak of 25.3 percent in August 2008. However, this inflation is higher as compared to 20.5 percent in the preceding month and 11.3 percent in the same month last year.

The recent downturn in CPI inflation was mainly due to a relative ease in food inflation that has dropped from 34.1 percent in August 2008 to 22.9 percent by February 2009.

Encouragingly, CPI non-food inflation on yearly basis showed a slight decline for the third consecutive month and was recorded at 19.6 percent in February 2009 as compared with a peak of 20.2 percent in November 2008 and 7.8 percent in February 2008.

It is imperative to note that the downward adjustment in domestic prices of key fuels in response to a decline in international oil prices is likely to further ease non-food inflation in months ahead. CPI food inflation started decelerating from September 2008 after reaching a three-decade high of 34.1 percent on yearly basis in August 2008 and reached 22.9 percent on yearly basis in February 2009. The prices of some key staples either showed a decline or stabilised in recent months. More importantly, the pace of decline of food commodity prices is slower than the downward trend in international market, which points towards specific domestic factors or market structure issues.

It is notable that a part of the gains was offset by the depreciation of the rupee during 2008. In case of wheat, the current ease in price level was mainly because of improved supply due to aggressive import of the wheat, decline in illegal cross border movement of the grain as lower international prices eroded incentives, and anticipation of a bumper crop as farmers cultivated more area (due to higher support price and support from favourable weather).

In case of edible oil and rice there is a risk of renewal of upward pressures on domestic prices due to recent gains in international prices.

Similarly, domestic price of sugar is likely to increase in months ahead due to lower domestic production in the season and speculative hoarding of the commodity.

The country is likely to face a shortfall of around 0.4 million tonnes of sugar during FY09, which may increase further due to higher usage of sugarcane for gur manufacturing.

However, the decision by the SBP of wheat prices eased in international markets following an above expected wheat harvest estimates in Australia coupled with improved prospects for wheat crop in Argentina and some parts of wheat growing regions in China as a result of rains in these areas.

International rice prices have recovered recently, indicating renewed pressures due to Thailand - Vietnam agreement on fixation of rice export price. staff report

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