Dec CPI may touch 17.1pc

Inflation likely to cross 19-month high

Aamir Abidi

KARACHI: The disruption in supply of food chain along with increasing commodity prices is expected to cause December 2010 consumer price index (CPI) inflation to jump at 17.1 per cent YoY, pushing MoM CPI inflation to 0.93 per cent. Perishable foods items i.e. tomatoes, egg, vegetable ghee prices increased 98.6, 5.64 and 3.13 per cent MoM along with that of non-perishable food items i.e. wheat & rice prices hiked 0.53 and 0.57 per cent MoM.

On the other hand, SBP tightening is diluting the effectiveness of monetary policy due to high-level of government borrowing from the SBP. While rising security and flood-related expenditures and continued power sector subsidies are one aspect of the problem of rising fiscal deficit and ultimately rising inflation.
Of the Rs398 billion expansion in M2 till 18th December 2010 during the current fiscal year, Rs305 billion is due to government borrowing from the SBP, which has been on an increasing trend since September 2010. Such borrowing has stoked expectations of increasing inflation.
Furthermore, higher Net Domestic Assets (NDA) to Net Foreign Assets (NFA) ratio and its strong association with CPI inflation also suggest that the inflation is likely to persist at double digit levels during FY11 i.e. full year CPI expectation of 15.5 per cent. Furthermore, delay in implementation of RGST and uncertainty in timing of foreign inflows may force SBP to increase discount rate by 50bps to 14.5 per cent.

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