Rural areas hit harder
Food prices rose by more than 10% for the fifth consecutive month in November, particularly hitting the rural economy, according to inflation data published by the Pakistan Bureau of Statistics Tuesday.
Food prices remained on the higher side, but the headline inflation (overall increase in prices of essential goods and services) slowed to 8.3% in November or 0.6% lower than the previous month’s tally. Food items have 34.6% weight (out of 100) in the consumer price index, which tracks these prices.
“Had it not been for sticky food inflation, which is more than 10% for the fifth consecutive month, the headline Consumer Price Index reading would have been even lower,” the Intermarket Securities said in a research note. Urban inflation continued to decelerate at 7% in November, compared to the same month of 2019 while rural inflation fell to 10.5% during this period, it said.
The PBS calculates the inflation rate by measuring the prices of a basket of 480 common goods and services, such as the cost of education, house rent, utility bills, food and beverages. A 10% increase in the inflation rate over a year means your wallets shrank by as much during the same period.
Food inflation was down to 13% in urban centers and 16.1% in rural centers in the last 12 months but prices of some major food items continued to rise on a monthly basis. These included chicken, potatoes and tomatoes, the IMS noted. By contrast, there was a sharp deceleration in wheat prices amid imports and a high-base effect slightly pulled the food inflation down.
A high inflation rate, which remained in double digits earlier this year, remains a challenge for the PTI government which faces severe criticism for not being able to manage it.
The average inflation rate for the year ending June 2020 was 10.74%, the highest annual inflation rate in the last eight years. This means Rs10,000 deposited in your savings account on July 1, 2019 were worth Rs9,000 a year later. The high inflation rate could be attributed to multiple factors. In 2019, the government presented an inflationary budget geared towards meeting the prerequisites for an IMF bailout programme signed later the same year. Under the programme, the government raised electricity and gas tariffs, devalued its currency more than 25%, raised duties in imports, and doubled the petrol tax in six months. On the other hand, untimely permission for exports of sugar and mismanagement in wheat procurement led to a full-blown wheat and sugar crisis, pushing inflation rate above 14.6% in January, the highest in a decade.
In order to contain inflation, the central bank raised interest rates to a multi-decade high of 13.25% and locked it there for several months before slashing it by more than 6 percentage points after Covid-19 struck, contracting the economy for the first time in 68 years.
Food prices still remain on the higher side, but overall inflation has slowed in the recent months.
“The dollar has come down in value and the food inflation has been brought a little under the control by the government,” said Adnan Sami, who is assistant vice-president at the Pakistan-Kuwait Investment Company. “The imports on wheat and sugar have also been completed. All of these factors have helped reduce the pressure on prices.”
The government reduced the price of petrol in November, which helped strengthen the downward pressure on inflationary trends in prices. The central bank, which fights inflation through its monetary policy, maintained the benchmark policy rate at 7.0% in November, noting they expect inflation to remain in the range of 9% to 10%.
“We expect high base effect to continue offsetting high food inflation until February 2021,” the IMS said in its report.
“We think the SBP will keep interest rates unchanged in the next MPS meeting as well, premised on still softcore inflation and decelerating food inflation.”