Inflation in February hits a four-year high, further acceleration expected in 2019

March 11, 2019 (MLN): According to data released by the Pakistan Bureau of Statistics on March 1^st, consumer prices rose by 8.2% year on year in February, the fastest pace of increase since June 2014.

Consumer price inflation was at a 56-month high in February, partly owing to a year-on-year increase of 4.5% in food prices, which have the largest weighting in Pakistan's consumer price basket. This was the fastest pace of increase in food prices since January 2018 and was mainly attributable to a sharp jump in the prices of tomatoes.

The spike in tomato prices was driven by a plunge in tomato imports from neighboring India after some farmers in that country refused to export their produce to Pakistan in the aftermath of the Pulwama terrorist attack. Tomato prices are likely to remain elevated in the near term, as trade between India and Pakistan is likely to remain affected by the bilateral tensions, which we do not expect to subside for several months.

Meanwhile, the second largest weighted category in the consumer price index-housing, water, electricity, gas and other fuels-also contributed significantly to headline inflation. Prices in this category grew by 11.6% year on year, much stronger than the average increase recorded in 2018.

Other significantly weighted categories-furniture, transport, and clothing and footwear-also recorded increases that were higher in February compared with their average in full-year 2018.

Therefore, it is likely that inflation will accelerate in 2019, owing to the lagged effect of currency depreciation and an expected rise in electricity and gas prices. Our inflation outlook assumes normal monsoon rainfalls over the year, but there is a risk that poor harvests could push up prices even further.

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