GST hike ups inflation to 7.15 percent in June

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KARACHI - The Consumer Price Index (CPI) inflation is expected to settle during the month of June at 7.15 percent year-on-year (YoY) compared to last month’s 5.13 percent YoY, said the analysts. On a monthly basis CPI is expected to clock in at 1.96%, they added.

“An increase in General Sales Tax (GST) by from 16% to 17% imposed in the budget is the main culprit behind the significant increase in inflation during June, 2013,” viewed InvestCap analyst Abdul Azeem. Moreover, he said, food inflation during the month (higher 2.4% MoM) is expected to be the major contributor, despite the government directive of no increase in GST on essential food items. By incorporating the June, 2013 data, full-year CPI inflation on a moving average basis is expected to conclude at 7.5% for FY13, down by 2% from an initial target of 9.5%, he said.

The shrinking spread of banking industry, after 50 basis points (bps) decline in policy rate to 9% urges banks to introduce new schemes for consumer loans, personal loans and car financing. The cheaper and readily available consumer financing is expected to increase the purchasing power of consumers which ultimately caused inflation to surge, said Abdul Azeem. Moreover, he said, the present expansion in broad money supply was largely due to higher government borrowing for budgetary support owing to heavy debt servicing and subsidies. Monetary expansion with heavy borrowing leads to dipping private sector growth and provides high inflation potential, he added.

Moreover, another factor is the presence of external risk, where any pressure on foreign reserves by net imports and repayments of foreign loans could magnify its impact on currency depreciation leading to high domestic inflation. “We expect the interest rates will remain stable at current level and no further easing during 1HFY14 is likely,” the analyst added. “Analyzing the prevalent trend of the CPI, coupled with the latest numbers released, we expect CPI for FY14 will remain in the range of 9.0% to 9.50%,” said the analyst. During FY13, he said, the monthly average CPI remained at 0.58%.

Even after assuming 0.75% inflation in each month of FY14, the resultant CPI is likely to settle around 9% YoY on a moving average basis.

Courtesy:   Pakistan Today

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