The headline inflation stood at 12.7 percent in Nov-19, in line with the expectations. On monthly basis, the toll is up by 1.34 percent. The single biggest contributor is none other than the red and round tomatoes – had the tomatoes prices remained unchanged in November, the monthly increase would have been at 0.82 percent and yearly increase at 12.1 percent. Assuming no change in tomato prices from Nov-18 to Nov-19, the CPI would have 11.1 percent. The interest rates could have been lower and economic slowdown could have been less.

The good news is that the prices of tomatoes and other perishable are now falling based on recent SPI reading and food inflation will be in negative in December (on monthly basis), but due to high base effect, the headline number is likely to remain north of 12 percent till Feb-20, and will start receding and may come in single digit by the end of the fiscal year. The policy rate in all likely scenario will start coming down by Mar-20, and any chance of decline in Jan-20 will depend upon the monthly number in Dec-19.

The food prices are driving inflation and making the life of common man difficult in days when the real wages are seemingly falling. The urban food inflation is up by 16.6 percent while the rural increase is even higher at 19.3 percent. The SPI – a better reflection of inflation for poor, has increased by 20.2 percent. The perishable food items are primarily responsible for this abnormal hike – up by 69.6 percent over the same period last year.

There are number of reasons for this increase – currency depreciation and its impact on transportation, wages increase, climate change – changing weather pattern, closing border with India, and lack of price administration control at district levels. Yes, absence of government price fixing ability is resulting in higher prices, but that does not justify the control methodology. That is happening for decades, but it's a flawed approach.

“What is the difference between unbridled ‘price hike' and a reasonable one?" “What is the difference between profiteering and profiting", tweets Dr Ali Hasnain from LUMS. The problem is not simply that the DC or magistrate has no training to make these distinctions. Even a PhD in Economics cannot reliably estimate efficient, market-clearing prices. Abnormal profits arise when markets are restricted. The government has to work on increasing the ease of new players becoming intermediaries (arthis) in agricultural markets (mandis), facilitate the development of value chains for perishable items, and improve the quality of agricultural inputs to insure increased supply.

Anyhow, the perishable items prices are coming down. Last month in CPI reporting, it was mentioned that without exception in the last ten years, perishable food prices declined during December – and based on SPI data for the last two weeks, the history is repeating itself.

Apart from food, transport prices increased by 0.46 percent over Oct-19 and 13.95 percent over Nov-18. The currency depreciation and its impact on petroleum prices is doing the damage, apart from the government rightly increasing the petroleum levy (PL) to not pass on the impact of lowering international prices (in the past few months) to consumers. The impact of inflation due to higher fiscal deficit is more pronounced and long lasting than inflation due to hike in petroleum prices.

The core inflation for urban group has been recorded at 7.5 percent in Nov-19 as compared to 7.7 percent in Oct-18, and the trend is similar in rural where the core inflation is a little higher at 8.4 percent. There are no signs of any demand driven inflation in months to come as economy is slowing down and fiscal deficit is tamed – with no additional borrowing from SBP. The higher foreign inflows are to improve Net foreign assets (NFA) to net domestic assets (NDA) ratio – historically inflation is inversely correlated to NFA/NDA ratio in Pakistan. The inflation is likely to be in single digit next year, and expect interest rates to be down by 100 bps till Jul-20 and further cut of 50-100 bps till Dec-20, if not more.