Business Recorder
Headline CPI inflation rose11.66 percent year-on-year in May, the highest in 24 months. Headline inflation stayed lower than market expectations, largely due to a bigger fall than anticipated in personal effects, detergents, footwearand fresh vegetables. The real story of May inflation rests with the sharp spike in core inflation – that rose to 9 percent in urban settings, highest since September 2024. The fiscal year to date inflation at 6.7 percent is now inching closer to the upper band of the central bank’s medium-term inflation target. Perishables nearly wiped all the increase in non-perishable on a month-on-month basis, led by a sharp decline in tomato and fresh vegetables prices that slid 43 percent and 25 percent, month-on-month. While tomatoes’ decrease was still in line with historical directional change, fresh vegetables recorded the sharpest month-on-month fall in 42 months. Combined with over 2 percent weight in overall CPI basket, the impact was felt across. Housing and transport indices were well in line with expectations, as lower adjustment for the month led to a moderate decline in electricity charges, whereas motor fuel increase was contained especially towards the latter half of the month. Electricity tariffs were up 36 percent year-on-year, and the average national domestic tariff now stands close toRs27/unit.With higher fuel price adjustment lined up for June, an increase close to 5 percent month-on-month is on the cards in lieu of electricity tariffs.transport sub-index, is subject to greater risks given the geopolitical uncertainty. But given the recent encouraging signs on the war front, the month-on-month price change has more chances of being on the lower side. Given that much of the headline inflation has been moved by transport fuel prices, this should keep transport inflation checked, all things constant. That being said, the real story is slowly building around core inflation, where prices of non—food non-energy essential household items have started to firm up. The signs were evident in the last two WPI readings, and readings for May, may well just be the start of what is in store in terms of core inflation. Footwear in urban settings rose an unprecedented 29 percent month-on-month – comfortably the highest monthly increase ever recorded. With a considerable weight of 1.48 percent, the impact was significant. Surprisingly, footwear prices in rural settings barely changed from a month ago, but it may well play catch up soon, at least directionally if not in terms of magnitude. Similarly, detergents registered a 33-month high, as sings were emerging in the WPI a month earlier. Household equipment have also become pricier at a much faster pace month-on-month, as soaring transportation costs are trickling to second round of inflation, via pass through. Construction wage rates, too, increased at the highest month-on-month rate in three years. All these point towards stickier prices going forward, even if energy related inflation cools off sooner. Core inflation is now well clear of the central bank’s medium-term target and that would make for an interesting input in the upcoming MPS. More economic data has to arrive before the next MPS, but core inflation alone warrants a deeper look as to how entrenched and how anchored the prices are for the near future.With the news cycle warning of higher standard sales tax in the upcoming budget and an even bigger in electricity tariff structure, in case of cross subsidy becoming more targeted, the impact on inflation could keep the MPS decision makers on their toes.
Go to News Site