Inflation eases to 12.4pc in February ahead of monetary policy decision

Inflation slowed down to 12.4 percent in February due to reduction in prices of essential food items, leveraging hands of the federal government ahead of two key meetings that will review the impact of monetary policies on the economy.

Based on a new methodology, the headline national Consumer Price Index (CPI) eased to 12.4 percent in February over a year ago, the Pakistan Bureau of Statistics (PBS) reported on Monday.

In January, the inflation index had jumped to the nine-year high of 14.6 percent, which had panicked the policymakers.

The pace of inflation, including food, slowed down both in urban and rural areas. The PBS calculates the inflation index by monitoring prices of 356 commodities in 35 cities and 244 goods in 27 rural markets.

The impact of food inflation was more pronounced in rural areas than in urban centres. The food inflation in urban areas that stood at 19.5 percent in January eased to 15.2 percent last month. Similarly, in rural areas, the food inflation pace slowed down from 23.8 percent to 19.7 percent, which is still very high.

In February, prices of the majority of perishable food items reduced as compared to January, which pulled the index down. There was also no increase in electricity prices on account of monthly fuel price adjustment in February, which also positively impacted the index.

But the core inflation, which is calculated by excluding food and energy items, has gone up both in urban and rural areas. The core inflation in urban areas increased from 7.9pc to 8pc and from 9pc to 9.4pc in rural areas.

In January, the headline inflation rate had exceeded the key discount rate of 13.25pc, which the central bank has maintained since July 2019.

The pace of inflation has started slowing, albeit still in double-digits, ahead of Monetary and Fiscal Policies Coordination Board meeting and the Monetary Policy Committee meeting. The board headed by the Finance Advisor, with governor State Bank of Pakistan in attendance, is scheduled to meet next week.

The Monetary Policy Committee headed by SBP Governor Dr. Reza Baqir is also expected to meet this month to announce the monetary policy for the next two months.

Due to a surge in core inflation the central bank may still resist the temptation to reduce the interest rates, although the federal government has upped the ante to get the interest rates down.