Inflation: Pain ahead

The headline inflation is creeping up again. CPI stood at 10. 9 percent in April 26, which is 21 months high, while the core inflation inched up to 13 months high at 8. 2 percent. The monthly increase is at 2. 5 percent, which is mainly due to increase in the fuel prices and its impact on transportation services and perishable food items. This is just the start, as more indirect impact of fuel prices revision to start getting visible on the CPI which may reach 14-15 percent in May and June. Seeing the inflation spike, SBP recent 100 bps increase in the policy rate makes a good sense. The inflation spikes are more pronounced in the urban areas as compared to the rural dwellings – both for headline and core, on monthly basis, urban CPI is up by 2. 7 percent versus 2. 1 percent for rural. In case of the core, the delta is even more – urban up by 1. 9 percent while rural increased by 1. 1 percent. Overall urban CPI stood at 11. 1 percent (core 9. 2%) versus 10. 6 percent (core 8. 5%) in rural areas. Food inflation is up by 1. 8 percent (MoM) which is mainly due to sharp increase in the perishable items – up by 15. 3 percent from March 26. The spikes are higher for urban areas in items like tomatoes (urban 57%, rural 45%) and fresh vegetables (urban 41%, rural 26%), as there is higher distance from farm to market for urban areas and that explains higher food prices. Similar is the story of fresh milk which has 7. 1 percent weight in the CPI basket– it’s up by 2. 9 percent in Urban areas while the increase in the rural is restricted to 0. 9 percent. The story of urban-rural diversion doesn’t stop here –while motor fuel increase ranged between 18-20 percent MoM, the transportation services are up by 28 percent in urban settings versus mere 8 percent for rural dwellers. Cities have more diverse bus services and other transport services while rural areas have limited basket and mainly economically where the increase is minimal. Since it is categorized in core inflation, it explains the widened gap in core too. Apart from fuel related direct and indirect impact, last month’s education index is up by 3 percent MoM with yearly increase stood at 8. 3 percent. There is no abnormality in the rest of sub-indices so far. Going forward, the indirect impact of the fuel price increase to be felt in many other sub-sectors. Going forward, wheat prices, which kept on falling, may have an increase as well. There are signs that wheat crops may get short from its target and its prices could go up. Plus, indirect impact of fuel prices increases is to be visible on broader inflation. And that, along with the base effect may take coming two months inflation to 14-15 percent. The full year average for FY26 is likely to be between 7-8 percent, marginally higher than SBP’s medium term target of 5-7 percent.

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