'Inflationary pressure growing again'

BUSINESS RECORDER REPORT
KARACHI (January 13 2010): Inflationary pressure is again growing in the economy, and continued fiscal stimulus could complement an expected rise in imported inflation, raising the risk of resurgence in domestic prices, says State Bank''s First Quarterly Report. According to the Report, released on Tuesday, Consumer Price Index inflation is likely to remain higher than the annual target of 9.0 percent for the year.

The report has projected a CPI inflation of 10-12 percent for the current fiscal year. "The adjustment in administered prices of key fuels amid rising international oil prices and cut in electricity subsidies are important factors behind the expected strengthening of inflationary pressures", the report said.

The report said that headline CPI inflation dropped to 8.9 percent YoY in October 2009 (the lowest level in the preceding 26 months), it bounced back to 10.5 percent in November 2009. Similarly, WPI inflation saw a sharp jump in November 2009 to 12.5 percent from only 3.8 percent YoY during the previous month, the report said, and added that an uptick in November was largely attributable to higher food prices on account of Eid-ul-Azha.

As a leading indicator, WPI shows growing inflationary pressures in the economy. This view is also reinforced by an uptick in inflation measured by SPI in recent months, continued high levels of core inflation and as well as strong CPI inflation numbers on a month-over-month basis for an extended period, the report said. The risk of resurgence in inflationary pressures is also evident from strong core inflation. Both indicators, the non-food non-energy (NFNE) and 20 percent trimmed mean, though declining since H2-FY09, remained high, it added.

One of the main reasons for the persistence in both measures of core inflation is the double-digit increase in house rent index (HRI) despite an easing since June 2009. Moreover, the rising trend in international commodity prices, particularly crude oil, metals and some food items, is likely to fuel inflationary pressures in the economy. The risk of higher inflation in food commodities also stems from weak monsoons in India, which would likely have negative spillovers on domestic prices.