Dec-10: Headline inflation shows no signs of receding

Dec-10 headline inflation clocked in at 15.46%: Higher YoY food prices (+20.4%YoY) maintained upward pressure on headline inflation which was recorded at 15.46% in Dec-10. While slight reductions in contribution from perishables and House Rent Index (HRI) helped, heavy weight ‘non-perishables’ category and electricity tariff hikes (low base effect) kept inflation at this level.

Dec-10 CPI falls 0.51% MoM- first of FY11: A steep 12.9% MoM decline in prices of perishables, and a marginal 0.28% MoM uptick in that of ‘non-perishables’ caused 1.9% MoM deflation in food category. Overall CPI declined by 0.51% MoM.

Electricity tariff hikes fueling Core Trimmed inflation- surges to 13.6%YoY: While core NFNE (HRI weight in Non Food is 40%) is drifting along its long run level of 9.5% due to declining trend in HRI inflation (up 7.6% YoY FYTD average), Core (Trimmed) has inched up to 13.6% YoY, possibly due to higher electricity tariffs

Downward rigidity in food prices has driven up CPI; Supply normalization to help going forward: While downward rigidity in food prices has driven up CPI so far, we believe GoP measures to correct demand supply imbalances, supply replenishment and stable electricity tariffs should help moderate headline inflation going forward. Risks to outlook include: 1) Oil price hike (FYTD average USD79/barrel) 2) Non-oil commodity price jumps (Palm oil and Pulses) & 3) Imposition of pending electricity tariff increments.

Dec-10 Headline inflation clocked in at 15.46%

Higher YoY food prices (+20.4%YoY) maintained upward pressure on headline inflation which was recorded at 15.46% in Dec-10. However, overall contribution of food subgroup declined to 60%, with the chunk coming from ‘non-perishables category’ due its 35.2% weight in CPI basket. Moreover, a cumulative 10% FYTD jump in electricity tariffs has caused inflation in the Fuel & Lighting sub-group to accelerate to 22.5% YoY – an 18-month high. The only major item showing a declining trend is the House Rent Index (HRI), which also explains why its contribution has been diminishing over consecutive months.

Dec-10 CPI falls 0.51% MoM- first of FY11

Adjustment in local food markets to supply shocks has led to a steep 12.9% MoM decline in prices of perishables. Coupled with a marginal 0.28% MoM uptick in prices of ‘non-perishables’, food category experienced 1.9% MoM deflation, causing overall CPI to drop 0.51% MoM.

Electricity tariff hike fuelling core trimmed inflation- surges to 13.6%YoY

Core NFNE, observed at 9.5% YoY in Dec-10, is hovering along its long run average and has declined marginally since Dec-09. However, this is explained by the declining trend in HRI (up 7.6% YoY FYTD average), which has a substantial weight in NFNE (Non Food weight at 40%). Core trimmed inflation on the other hand is clinging to FY10 levels, and inched up another 200bps YoY in Dec-10. This phenomenon can be explained by 10% FYTD increment in electricity tariff (4.37% weight), as well as higher YoY natural gas prices. Given no other tariff increments materialize in 2HFY11 (news reports), core inflation should dip, unless food inflation spill over causes inflationary expectations to gather pace.

Downward rigidity in food prices has driven up CPI; Supply normalization to help going forward

Post floods food prices have shown some downward rigidity.  However, as GoP curtails/bans exports of certain vegetables to India and supply in local markets is replenished with fresh harvests, food and headline inflation should dip going forward. Moreover, if electricity tariffs are maintained at current levels in 2HFY11 (news reports), high base effect will also help moderate YoY inflation in Fuel & Lighting category, and further decelerate inflationary pressure. Risks to outlook include: 1) Oil price hike (FYTD average USD79/barrel) 2) Non-oil commodity prices (esp. Palm oil) & 3) Imposition of pending electricity tariff increments.

Economic & Political News

Fertilizer sector: ECC may approve revised plan of gas load management

Economic Co-ordination Committee (ECC) of the cabinet scheduled to meet today (Thursday) may approve a revised gas load management plan for fertilizer sector to curtail gas load shedding from 45 to 30 days in a bid to cut prices of fertilizer.

Revenue collection: Govt eyes taxing corporate sector assets, earnings

After the first review of the IMF had mentioned some alternative measures that could be implemented to increase revenue collection. These included a carbon tax, gross asset tax and wealth tax. Government is considering all options, including a one-time wealth tax surcharge. This surcharge would be a one-off deduction against income, over and above the usual income tax rate. However, member Tax Reform Coordination Group (TRCG) Shabbar Zaidi has advised MoF against the imposition of any new taxes, including gross asset tax or any new sales tax. He added that a recent meeting held between the TRCG and MoF officials had urged GoP to strengthen the administrative apparatus of the tax collection network.
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