Daily Times

The Consumer Price Index (CPI) inflation rate slowed to 8.2% year-on-year in May, the Pakistan Bureau of Statistics (PBS) said on Monday.

The inflation rate was 8.5% in April, and currently stands at 10.94% for the period from July to May, 2019-20. The CPI peaked in January, registering 14.56% year-on-year. Food inflation, with a weight of 34.5% in the overall number, was 12.24% year-on-year for May, while transport inflation was recorded at -7.46% for the same period.

The pace of reduction was slowed last month due to increase in prices of food items during the month of Ramazan that partially offset the impacts of reduction in petroleum products prices. The 8.2% inflation is the lowest in the past 11 months. Last time in June 2019, the inflation had been recorded at 8% – the level from where it had started rising and peaked at 14.6% in January this year.

Economic activities that largely remained at a standstill due to partial lockdown in the wake of Covid-19 were also restored in the second half of May. The pace of inflation slowed down both in urban and rural areas.

The PBS calculates the inflation by monitoring prices of 356 commodities in 35 cities and 244 goods in 27 rural markets.

The overall inflation rate in urban areas eased to 7.3% and to 9.7% in rural areas. But the food inflation rate increased both in the urban and rural areas. The food inflation in urban areas that stood at 10.4% in the preceding month, increased to 10.6% in May. In rural areas, the pace of food inflation surged from 12.9% in April to 13.7% last month.

However, prices of a majority of perishable food items increased compared to the preceding month.

Food inflation during May escalated by 1.63% on a month-on-month basis, due to considerable hike in prices of key items including chicken, potatoes and onions. Due to its higher weight, food inflation was able to offset the 15% reduction in domestic fuel prices, which reduced the transport index by 6.5% on month-on-month.

Core inflation, which is calculated by excluding food and energy goods, went down in urban and rural areas. The core inflation in urban areas slowed down from 6.4% to 6.3% and remained at 8.5% to 8.4% in rural areas. The headline inflation is slightly positive and urban core inflation is lower than the key policy rate of 8%. The real interest rate, keeping in view the core inflation, is still positive by 1.7%.

The central bank last month further reduced the interest rate by 1% but it was still lower than market expectations and the desired expressed by Prime Minister Imran Khan to cut the rate to 7%. For almost nine months, the central bank kept the interest rates at 13.25% to attract hot foreign money, which significantly dampened economic growth prospects besides increasing debt servicing cost.

The Planning Commission has also recommended the Monetary and Fiscal Policies Coordination Board to adopt accommodative monetary and fiscal policies to boost the economy. The commission expects average inflation rate of 6% in the next fiscal year, which is lower than the predictions made by the International Monetary Fund (IMF) and the State Bank of Pakistan (SBP).

After the recent cut in interest rate by 1% to 8%, real interest rates are now expected to hover in the negative region. “We believe negative real interest rate phenomenon will be temporary as we anticipate inflation to slow down further once food prices normalise in the coming months,” according to KASB Research.