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September 5, 2019

CPI rebalancing unlikely to help economy: analysts


September 5, 2019

KARACHI: The government managed to show consumer inflation going down after rebasing of the year that smacked of ‘juggling’ with the basket, creating a room to spur growth through interest rate cut, analysts and economists said on Wednesday.

An independent economist Asad Sayeed said the revision of consumption sectors in the consumer price index (CPI) basket is quite unusual. “Reducing the weight of housing and utilities by 578 bps (basis points), transport by 129 bps, and increasing the weight of restaurant and hotels by 570 bps is quite unusual and do not reflect the true picture.”

The CPI inflation for August 2019 clocked in at 10.49 percent as the Pakistan Bureau of Statistics revised the base year from FY08 to FY16, while weight of certain consumption groups were also revised. Based on the previous base year of 2007/08, CPI for July and August 2019 settled at 10.34 percent and 11.63 percent, respectively, which took average inflation for July-August FY20 to 10.98 percent. Under the base year of 2015/16, CPI arrived at 10.49 percent for August and 8.39 percent for July. After rebasing, average inflation settled at 9.44 percent for the two months of the current fiscal year.

Advisor to President Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Mazhar Ali said presenting lower inflation figures through juggling of numbers would not improve the economy.

“The CPI inflation below market expectation does not mean that the central bank would slash policy rates,” Ali said. Interest rates would not come down unless inflation is really down. “I believe there would be another minor increase in the interest rates in the next policy announcement.”

Renowned banker Kamal said as the inflation came down there is a room for the central bank to reduce the policy rates. “I think rates would not be reduced in the upcoming policy statement, but would start easing after that.”

Sayeed said the central bank has kept a margin of 2.0 percent between inflation and interest rates, “and since the inflation has come down, by any method, we can expect a reduction in the interest rates.”

CPI rebasing activity is conducted after every 10 years and it was to be completed by June 2017. However, it was delayed to June 2018 due to population census.

The process was further delayed due to general elections last year. The base year of inflation has been changed from FY2018 to FY2016 under the rebasing, rural areas have been included to reflect more realistic consumption pattern of the public and weights of certain products were changed.

Kamal said rebasing of the year while computing inflation is not a new thing, and it happens every 10 years. “Since we are in the International Monetary Fund program, I believe rebasing of the year and revision in weight of consumption groups is well discussed with the fund.”

“Around 60 percent of the country’s population lives in rural areas and government approved the revised mechanism to reflect rural consumption, which was earlier being ignored,” he added.

Arsalan Hanif at Arif Habib Limited said initial impression suggested that reduction in weight of some of the group heads with higher inflation, including housing and transport by 578 basis points and 129 basis points, aided the decline in inflation. “Augmented weight of other groups with lower inflation, for instance restaurant and hotels by 569 bps, also brought down inflation on a yearly basis.”

Under the rebasing, weight of food sector was reduced by 25bps to 34.6 percent. Housing weight was cut by 578 bps to 23.6 percent, while weight of clothing and footwear was increased by 103bps to 8.6 percent. Weight of transport sector was reduced by 129bps to 5.9 percent. Household equipment weight was reduced by 11bps to 4.1 percent. Weight of education was slashed by 15bps to 3.8 percent.

Communication weight eased 101bps to 2.2 percent. Weight of miscellaneous group was increased by 212bps to 4.9 percent. Weight of health was increased by 60bps to 2.8 percent, while weight of restaurants and hotels was increased by 5.69 percent to 6.9 percent in the overall basket.

The sequential increase in CPI inflation for August can be attributed to higher food prices, which were up 3.4 percent in August. Within food index, prices of chicken, tomatoes, onions and fresh vegetables witnessed significant increase during the month. Higher food prices during the outgoing month can be attributed to Eid-ul-Azha and supply-side disruption on heavy rainfall.

Ali of FPCCI said things were not moving in the right direction and referred to a recent meeting of business community with Prime Minister Imran Khan, in which the PM expressed concerns over the ongoing economic situation.