Inflation is down and so are its expectations

Improved administrative food prices have kept inflation subdued for the third consecutive month after it experienced huge increase in perishable food prices earlier. Ever since the demand pressures emanating from Ramzan and Eid spending played havoc, the PML-N government was all geared to smooth out the mandi system. That ensured the perishable food items to calm down substantially.

The perishable food sub-index came down by 33 percent in the last three months. Its cascading effect on the CPI is visible. For the third time this year, it remained below eight percent to make the eight months’ average to stand at 8.65 percent.

In addition to calming food prices, the impact of significant upward revision in electricity and gas prices didn’t increase CPI to the extent analysts were expecting. Some may smell fudging or creative accounting in computing the price indices. Low inflation has surprised many, including the SBP.

It seems that the full-year inflation is going to remain around or below nine percent, likely missing the SBP’s revised target of 9.5-10.5 percent. Although quarterly house rent revision increased the index by 9.3 percent in last two month, core inflation is falling. Both non-food non-oil and trimmed core inflation are on downward trajectory, hovering around eight percent in February.

Mind you, low-base effect in housing index resulted in higher yearly growth in index in February, but on a monthly basis, it stagnated.

Then, the demand-pull pressures are subsiding as well; as on the advice of IMF, government is trying to square its borrowing from the central bank. Fiscal financing has come down from around Rs650 billion a few weeks back to stand at Rs565 billion as of February 14. But, that has an adverse impact on SBP’s profitability, and the onus of government borrowing is likely to shift on commercial banks, which would crowd out some growth witnessed in the private sector credit.

However, the positive out of all this is less inflationary pressures. In addition, the lack of foreign inflows resulted in low expansion in monetary assets, which grew by a mere five percent in fiscal year-to-date as compared to eight percent in the corresponding period of last year. That also, somehow, helps in low-demand pressures in a supply-constrained economy.

To complement all this, the stable rupee, after it sharply fell in the first quarter, is keeping a check on imported inflation. That notion is supported by suppressed commodity prices, especially oil, in the international market.

In a nutshell, these factors not only resulted in fall in inflation but have also lowered the inflationary expectation. Hence, it’s safe to assume that interest rates have peaked and going forward, once inflation is further tamed, some easing in monetary policy cannot be ruled out.