Consumer Price Index (CPI) inflation for the month of July 2016 stood at 4.1 per cent year-on-year (YoY), which is a 19-month high and higher than market expectations. In June, the CPI inflation stood at 3.2 per cent YoY.
On month-on-month (MoM) basis, CPI inflation increased by 1.3 per cent in July 2016 against increase of 0.6 per cent during the previous month.
Analysts attribute this to increase in food inflation which contributes around 35 per cent to the CPI index.
Food inflation in July 2016 clocked in at 21 month high of 3.9 per cent YoY. This compares with 1.2 per cent food inflation recorded in the previous month and -0.3 per cent in July 2015.
On MoM basis, food inflation was up 2.7 per cent in July 2016 vs 1.3 per cent in the previous month.
Major food items that saw monthly increase included tomatoes (up 92 per cent), fresh vegetables (up 29 per cent) and potatoes (up 17 per cent). On the other hand, prices of food items that saw monthly decline were chicken (down 4.5 per cent) and fresh fruits (down 2.5 per cent).
Housing, water, fuel and lighting segments, which hold a weight of around 30 per cent in CPI, was up 5.1 per cent YoY. This includes the quarterly increase in house rent that was up 1.25 per cent MoM. Other non-food items that showed significant monthly increase were personal equipments (up 2.3 per cent), motor vehicles (up 1.3 per cent), water supply (up 1.1 per cent) and construction input items (up 1.0 per cent).
Core inflation for the month of July 2016 remained flat at around 4.5 per cent YoY and was up 0.6 per cent MoM compared to 0.1 per cent MoM in the previous month in June 2016.
In 2016-17, inflation is expected to remain in the range 4.5 per cent-5.0 per cent, which is below the government target of 6 per cent. The State Bank of Pakistan (SBP), in its latest monetary policy review, expects inflation to remain in the range of 4.5 per cent-5.5 per cent during the current fiscal year.
Pickup in food inflation and international oil prices remain key risks that can adversely affect inflation outlook.
Going forward, inflation might rise in the coming months on the back of expected revision in gas tariffs and an anticipated depreciation of Pakistani Rupee against the US Dollar.
The SBP in its recently announced monetary policy statement has decided to keep interest rates unchanged for the next two months. SBP expects the average inflation to remain between 4.5 and 5.5 per cent during 2016-17. However, the SBP also mentioned some major risks to this projection which include uncertainty in international oil prices, sluggish commodity prices, upward revision in gas tariffs and fiscal slippages.
