Consumer inflation falls to 8-month low of 8.5 percent

KARACHI: Annual consumer inflation fell to an eight-month low of 8.5 percent in April, compared to 10.2 percent in March due mainly to falling energy prices, but lockdown-induced waning consumer demand paints a bleak economic picture with early signs of disinflation, analysts and economists said on Friday.

Pakistan Bureau of Statistics (PBS) data showed that consumer inflation was still a little above 8.3 percent recorded in April 2019. On month-on-month basis, it decreased 0.8 percent in April 2020 from 0.04 percent in the previous month and an increase of 0.7 percent in April 2019. Consumer price index (CPI) inflation raced up to 10.5 percent in August last year from 8.4 percent a month earlier.

Planning Minister Asad Umar said it’s the third successive months of sharp decline in inflation with CPI dropping more than 6 percent in last three months.

“With the sharp reduction in petroleum prices on May 1, May inflation will be still lower,” Umar said in a tweet.

Saad Hashemy, executive director at a brokerage BMA Capital said inflation number is low because of lower energy prices and impact of lockdown, “which has negatively impacted demand”. In the last two months, prices of petrol and diesel have been down 27 and 35 percent, respectively, according to an estimate of Topline Research.

Petroleum products and gas account for less than 20 percent of the consumer inflation basket and certainly their price reduction reflects in lower inflation reading. But, does this augur well for consumers facing price escalation or economy on the verge of negative territory almost first time in the history?

“Challenging times ahead,” said Abid Suleri, executive director of a research institution Sustainable Development Policy Institute. “In the short-run, consumers will be happy about these falling numbers. However, in the long-run, the aggregate output would fall below optimum output, contraction of business cycle, which means loss of unemployment.”

More than two months of coronavirus lockdown wreaked havoc with the already-crumbly economy with the International Monetary Fund and the central bank forecasting growth at negative 1.5 percent during the current fiscal year of 2019/20. Although delivering 425 basis points rate cut in an unprecedented short span of one month, the State Bank of Pakistan (SBP) has no tool to spur growth amid the novel coronavirus that upended the global economic activities.

“Major policy is monetary policy,” said Tahir Abbas, deputy head of research at Arif Habib Limited. “All the measures taken recently by the SBP were to pull demand.”

Suleri and Sakib Sherani, former members of the prime minister’s economic advisory council, are among economic czars who see signs of disinflation that follows contraction in business cycle or recession.

“Pakistan will continue to experience a strong disinflationary environment due to a fall in aggregate demand and the sharp drop in oil prices,” said Sherani, who sees inflation under 5 percent in the coming months.

Suleri said there is a slow onset of disinflation. “Petroleum prices are temporarily dropping. Demand is reduced due to lockdown, and industry is contracting,” he added. “Unlike ordinary disinflation, we don’t know how temporary is the temporary global oil price relief due to COVID-19 related uncertainties.”

Analysts are uncertain how long would the oil fall’s benefit remain intact. They are unanimous consumer inflation would be in the range of 10 to 11 percent for FY2020. The market is expecting it to further fall between 6 to 8 percent in the next fiscal year. Inflation rate in July to April clocked at 11.22 percent.

“Going forward, inflation will likely remain lower due to continued demand destruction that is being seen both locally and globally,” said Hashemy. “Low international oil prices will play a key role in keeping inflation down. Growth will likely pick up once lockdown measures are gradually lifted.” PBS said CPI inflation urban increased 7.7 percent year-on-year in April, compared to an increase of 9.3 percent in the previous month and 8.4 percent in April 2019. On month-on-month basis, it decreased 0.7 percent in April 2020, compared to an increase of 0.1 percent in the previous month and an increase of 0.8 percent in April 2019.

CPI inflation rural increased 9.8 percent year-on-year in April, compared to an increase of 11.7 percent in the previous month and 8.1 percent in April 2019. On month-on-month basis, it decreased 1.1 percent in April 2020 as compared to a decrease of 0.1 percent in the previous month and an increase of 0.6 percent in April 2019.