Gas price bomb.

THE news that the regulator has asked for another massive increase in the price of gas, which might be as high as 221pc for some categories of consumers, has sent a shockwave through the business community. Those who rely on gas as a primary fuel, whether for boilers or captive power plants, could see their energy cost rise at a time when they are already struggling to keep their business running.

And perhaps more importantly, the price of gas could send yet another inflationary pulse through the economy, forcing the central bank to keep interest rates high at a time when the market is increasingly anticipating a cut in rates from around March onwards. Between high interest rates and high energy prices, the pace of economic activity and any sense of a return to economic growth could potentially be at stake, precisely at a time when the government has begun to talk about moving from stabilisation to growth.

A couple of things are important to point out though. First, the rise in inflation this year has been driven only partially from a rise in utility prices. In significant measure, it is also driven by devaluation of the currency, volatile oil prices at least in the first half of the year, and at least in part by higher taxes. At least that was the assessment of the State Bank back in July when it said that it expects inflation to average 11-12pc in FY20 from 7.3pc in FY19.

But that assessment was based, in part, on two hikes in utility prices, especially gas, one in July and the second in September. In the middle of September, in response to fiscal pressures, the government sought to raise an additional Rs94 billion from gas consumers through a raft of tariff hikes that were as large as 143pc for high-end consumers and as low as 10pc for those in the bottom slab. Additionally, industry was slapped with around 50pc increases in its gas tariffs. The new tariffs took effect at the start of October.

This time utility prices are responding to variables that the inflation forecast has most likely not included.

In the November monetary policy statement, the State Bank noted that inflation in October was 'somewhat higher than expectations but largely reflected upward adjustments in administered prices and rise in prices of food items primarily due to temporary supply disruptions'. That month the Consumer Price Index rose by 1.8pc from the previous month, at a time when the expectation was that it would either be flat or perhaps start easing.

Each...