Pakistan’s Inflation has touched a high of three years and nine months at 5.8% in July. According to the Pakistan Bureau of Statistics (PBS), Inflation measured by the Consumer Price Index, the average rate of increase in prices of 40 dozen items stood at 5.83% in July, reported on August 1. It is the highest level in the past 45 months. In October 2014 inflation was recorded at 5.8%. On month-on-month basis, it increased by 0.9% in July 2018 as compared to an increase of 0.6% in the previous month and decrease of 0.3% in July 2017.
After October 2014, the pace of increase in prices started to slow down and even slipped below 2% at one point. However, increase in the prices of petroleum products and rupee devaluation against the US dollar since December 2017 has pushed the pace of inflation in the country.
Sector wise analysis
The heavy-weight house rent index during the quarter is likely to increase by 5% YoY, while higher fuel prices lifted motor fuel prices and transport services by 5.7% and 4.98% YoY, respectively.
Core inflation measured by non-food non-energy CPI (Core NFNE) increased by 7.6% on (YoY) basis in July 2018 as compared to an increase of 7.1% in the previous month and 5.6% in July 2017. On (MoM) basis, it increased by 1.2% in July 2018 as compared to increase of 0.3% in previous month, and an increase of 0.7% in corresponding month of last year i.e. July 2017.
Core inflation, measured by 20% weighted trimmed mean CPI (Core Trimmed) increased by 5.9% on (YoY) basis in July 2018 as compared to 5.4% in the previous month and by 4.0% in July 2017. On (MoM) basis, it increased by 0.9% in July 2018 as compared to an increase of 0.2% in the previous month and an increase of 0.4% in corresponding month of last year i.e. July 2017.
SPI inflation on YoY increased by 3.6% in July 2018 as compared to an increase of 1.9% a month earlier and a decrease of 0.4% in July 2017. On MoM basis, it increased by 1.2% in July 2018 as compared to an increase of 1.8% a month earlier and a decrease of 0.5% in July 2017.
Wholesale Price Index (WPI) inflation on YoY basis increased by 10.5% in July 2018 as compared to an increase of 7.6% a month earlier and an increase of 0.7% in July 2017. WPI inflation on MoM basis increased by 2.4% in July 2018 as compared to an increase of 1.5% a month earlier and a decrease of 0.2% in corresponding month of last year i.e. July 2017.
How the inflation rate calculated in Pakistan?
Pakistan has been using a 10-year-old base to calculate inflation. There has been a significant change in spending patterns during the past 10 years but the government continues to use 2007-08 as base year to calculate the increase in prices.
The PBS announced that from July it would change the base year to 2015-16 and also start to capture the price trends in the country’s rural areas.
The CPI index is calculated by checking prices only in urban centres. The PBS had promised that the new inflation basket would comprise of 600 items including 244 in rural areas.
Important effect
The PBS data showed that on a year-on-year basis, kerosene oil prices jumped 37% and petrol 24.8% in July over the same month last year. Due to the increase in prices of petrol and high speed diesel, transport services charges also went up 13.6% last month. The cost of education services also increased 13% in July. In the food group, betel leaves rates increased over 161.7% due to imposition of regulatory duties. Tomato prices jumped over 38%, followed by 11% increase in the price of meat.
Oil prices increased significantly by 9.5pc, which caused uproar within the nation. Pakistani rupee has been devaluing since December 2017 and has lost almost 3.7pc of its value as of now. In December, the value of rupee per US dollar was almost 105 but it observed a steep rise reaching 119.84 in June 2018. This was a great shock to the macroeconomic situation as it gave rise to many more problems for Pakistan’s economy is currently facing. According to data combined by Bloomberg, the Pakistani rupee was Asia’s worst-performing currency this year. Some analysts expect the currency to drop further. Standard Chartered PLC predicts that the rupee will fall to 125 per dollar by the end of the year and International Monetary Fund may request authorities to weaken it even further.
The World Bank states that Pakistan’s inflation is expected to rise in fiscal year 2018-2019 and will remain high till fiscal year 2020. The outcome of the devaluation of Pakistan rupee against US dollar in the domestic market incidentally coincided with a rise in the crude oil prices in the global market resulting in an upward trend in oil prices from January 2018. The trend will cause an increase in the manufacturing and transportation cost resulting in price hike of all the commodities produced locally. This will be the largest challenge for Pakistan's new government how it deals with this difficult economic problem.