Consumer Price Index (CPI) is expected to register a 12.46 per cent YoY rise for the month of July 2011 against the rise of 13.13 per cent YoY recorded in June 2011. While, owing to increasing food prices, on MoM basis CPI is expected to register an increase of 0.63 per cent compared to a rise of 0.55 per cent experienced during June 2011. However, it is believed that rising inflation is not just a symptom of higher global commodity prices, in particularly food but it also reflects strong monetary growth over the years led by public sector credit growth.
For the month of July 2011 we expect the SPI to post a mere rise of 0.3 per cent MoM against 1.2 per cent MoM registered in June 2011, said Saad Khan at AHL, adding that this price surge is due to strong demand of food products prior to the start of Ramadan. This rise in SPI is more of a temporary effect and will fade away post Ramadan he further said. This is expected due to stabilisation of world commodity prices, better than expected staple crop projection in Pakistan in FY12 and 12 month moving average of SPI suggesting a change of trend, he added. However going forward in FY12 inflationary risk will mainly emanate from rising non-food and non energy prices along with monetary expansion experienced in the past.
Core inflation measured through the non-food non-energy (NFNE) has consecutively registered double digit YoY growth in May 2011 and Jun 2011 of 10.2 per cent and 10.4 per cent respectively. It is believed that this price rise is contributed (if not solely) through growth in money supply. Strong expansion in money supply caused by excessive credit growth, mainly dominated by public sector borrowing (registering in excess of 25 per cent YoY growth since Jan 2009). For instance government borrowing which to date stands at Rs64billion (23 per cent YoY rise in stock) has led to private sector crowding out (registering an average 4.2 per cent YoY rise in FY11). Hence justifying the reason that inflation is not simply an imported phenomenon (oil, food, raw material etc.), but rather monetary in nature.
