Moderation in inflation rate

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The latest price indices reveal that the rate of inflation, though not subdued to the desired level as yet, has moderated somewhat in the recent months. The rise in Consumer Price Index (CPI), after remaining in double digits till June, 2012, has shown a generally declining trend since then and stood at 7.38 percent on year-on-year basis in February, 2013 as compared to 8.1 percent in the previous month and 11.0 percent in February, 2012.

The increase in core inflation measured by non-food non-energy CPI (Core NFNE) was also lower at 9.6 percent in February, 2013 as compared to 9.9 percent in the preceding month and 10.6 percent in the corresponding month last year. All the sub-indices, except perishable food items, contributed to the increase in the overall CPI but the most prominent were beverages and tobacco (+ 18.54 percent), clothing and footwear (+ 15.72 percent), health (+ 13.19 percent) and recreation and culture (+ 16.97 percent). The average increase in CPI during the year also showed the same trend. During July-February, 2013, CPI rose by 8.16 percent as compared to 10.79 percent in the corresponding period last year.

The fall in the rate of inflation as measured by the increase in CPI is very welcome indeed. The decrease in CPI, SPI and WPI in just two years from 14.08 percent, 17.97 percent and 19.99 percent in February, 2011 to 8.16 percent, 7.93 percent and 8.07 percent respectively in February, 2013 on year-on-year basis is of course no mean achievement. A similar trend could be witnessed in the average price indices during FY11 and FY13. As such, though economic difficulties of the common man still continue to be enormous, at least one source of misery has been alleviated to a certain extent. Also, softening of price pressures would reduce some pressure on the exchange rate of the rupee and allow a wider space for monetary policy formulation.

However, most of the analysts including this newspaper are of the view that easing of inflation in the recent months is only a temporary phase and price pressures are likely to re-emerge quite strongly in the medium to long-term. This argument is based on quite plausible reasons. As it is, the recent reduction in inflation is very much due to a fall in the sub-index of "perishable food items" which carries a high weight in the overall CPI. As soon as the prices of perishable food items would resume their upward momentum, which is very likely, the CPI and other price indices would also again come under a great deal of pressure. The recent increase in fuel and oil prices in the domestic market and rapid depreciation of exchange rate of PKR would also take their toll. However, the most important factor pushing up the inflation rate would be a widening fiscal deficit and the government resorting increasingly to printing more currency notes to finance this deficit. Such demand pressures would have been less harmful if availabilities in the economy, generally measured by the GDP growth rate, would have increased commensurately to absorb higher doses of liquidity injections in the economy. Since this is not the case at the moment, a higher rate of inflation looks like a real possibility in the coming months. In order to ward off such a possibility, we could only urge upon the authorities to desist from expansionary fiscal and monetary policies and remove all kinds of impediments towards growth as soon as possible. This is probably the only way to ensure that the current price trends continue to persist and the country is saved from the scourge of high inflation.

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