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Seven food items contribute 47.1pc to inflation: SBP report

02 June, 2008

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KARACHI: The State Bank of Pakistanís third quarterly report highlights that only seven food items with a total weight of 19.9 per cent in the CPI basket contributed 47.1 per cent to the overall inflation during April 2008.

While the prices of most of the food items are rising, three items contributed 56.1 per cent to the food inflation during April 2008. Wheat contributed 15.8 per cent to the food inflation, vegetable ghee 10.5 per cent whereas, fresh milk 8.7 per cent.

The CPI (Consumer Price Index) food inflation was 25.5 per cent during April 2008, as compared to 9.4 per cent in the corresponding month last year. The quarterly report notes that trends of food inflation are similar in both CPI and WPI.

At the same time, it is important to note that non-food inflation is also likely to reach close to double-digit levels by the end of the current fiscal year. CPI non-food inflation rose to 11.2 percent in April 2008 compared with 5.2 per cent in the same month last year.

The recent increase in nonfood inflation is mainly attributed to the jump in inflation in house rent index (HRI) and cleaning, laundry and personal appearance sub-groups during April 2008.

The rise in HRI is principally owed to increasing international metal prices and the continued uptrend in the domestic wages of construction workers. Moreover, a trend reversal in sub-groups of transport & communication, as well as, fuel and lighting also put upward pressures on nonfood inflation.

Income group-wise Inflation: The contribution of food inflation in the overall CPI remained high in the first nine months of FY08. This resulted in a larger incidence of inflation for the low income groups, where food staples typically account for a greater proportion of total expenditure.

Wholesale Price Index (WPI): Inflation measured by WPI recorded 23.5 per cent growth during April 2008, which is significantly higher than the 6.0 per cent recorded in April 2007.

WPI food inflation reached 24.6 per cent in April 2008 compared with 8.4 per cent in the same month last year. WPI non-food inflation also rose to 22.7 per cent in April 2008 compared to a subdued 4.3 per cent during the same month last year.

Sensitive Price Indicator (SPI): Weekly inflation measured by SPI also increased considerably from 7.7 per cent in the last week of FY07 to 25.4 per cent in the first week of May 2008.

The report states that there is a need to take necessary administrative measures to protect low-income households by providing targeted subsidy to them through ration cards, utility stores or through students of public schools.

Providing subsidy is, however, a short-term measure therefore in the long-term, investment in the agriculture sector to raise productivity is essential. This may be done by providing certified seeds, access to institutional credit, subsidy on fertiliser, reducing wastages, water reservoirs and investment in value addition chains.

If inflationary pressures are, principally driven by rising food prices, a tight monetary posture may help contain second-round effects of high food inflation on CPI non-food inflation.

However, heavy government borrowing from SBP undermines its efforts to mitigate second-round effects of sustained high food inflation, which further fueled the inflationary pressures. As a result of large fiscal deficit, money growth remained well above the desired level and more than required growth in liquidity complicates monetary management.

The muted impact of monetary policy is also evident in the rising core inflation throughout the FY08. Core inflation, measured by 20 per cent trimmed mean, accelerated to double digits (14.1 per cent -historic high level) in April 2008.

Given the present inflationary pressures in the economy, SBP forecasts were revised upward with CPI inflation likely to fall between 10 to 11 per cent during FY08, significantly higher than the 6.5 per cent target for the year.


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