Brace for impact as inflation hits four-year high

November 2, 2018

Photo: AFP

The recent policy decisions by the newly formed government have started showing their impact on the economy driving October’s inflation rate to 7%, its highest level in the last four years.

Last time inflation rose to this level or above was in September 2014.

Among the commodities that saw the highest increase was gas, whose prices have more than doubled in October compared to the same month of 2017, the Pakistan Bureau of Statistics revealed on Friday.

From bathing to commuting outside the city and even eating chicken is going to cost more now compared to the same time as last year.

This is because the prices of Dettol soap (up 51.75%), bus fare outside city (up 50.60%), high speed diesel (up 34.20%), kerosene oil (up 31.82%), petrol (up 26.08%) and CNG (up 26.02%), and Chicken (28.31%) have increased.

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Transportation and perishable food like chicken make up 12% of the overall consumer price index (CPI) or basket of common goods and services. The PBS uses this basket to track the prices of essential items an average household consumes every day. Gas comes under energy, which has 29.4% weight in the index. Therefore, the price increase in these areas pushed the index up last month.

In March 2018, the inflation rate was hovering around 3.25%, but the prices have been going up since then. This is because of a rise in international crude oil prices and depreciation of the Pakistani rupee.

The dollar is being traded at Rs132 now, up nearly 20% from Rs110 of March. The recent measures by the government, such as increasing gas prices have also pushed the prices further up.

All these development have increased the cost of production for companies, which then pass its impact on consumers in the form of price increase. For example, automakers have increased prices recently because of rupee devaluation while fertiliser and cement companies also passed on the hike in gas prices to the consumers.

The government raised the price of gas because it is short on cash and cannot afford to subsidise losses of gas sector anymore—the two main gas companies report Rs152 billion per year in the loss.

Most recently, the government has also increased prices of electricity and petrol, whose impact will be reflected in November’s data.

The inflation rate could reach 7.5% by June, according to a forecast by the State Bank of Pakistan, which raised its policy rate to 8.5% on September 29 to keep inflation under control.