NationalVolume 14 Issue # 15

Inflation: An inexorable spiral

After a brief respite, inflation has resumed its upward spiral. According to the latest data released by the Pakistan Bureau of Statistic, the country’s inflation widened to 8.2 per cent year-on-year in February, driven by faster rupee depreciation and increasing demand pressure.

The PBS monitors retail prices and computes the Consumer Price Index (CPI) for a basket of 487 items collected from 40 cities and 76 markets. A detailed analysis shows that inflation has now crossed the four-year high of 6.78 percent recorded in October last year — the period when global oil prices started inching upwards. The average inflation during the July-February period rose by 6.46 percent on a yearly basis. During the last two months, inflation surged due to an increase in the prices of fresh vegetables and fruits in major urban centres.

 It may be recalled here that the government had projected 6 percent annual inflation for the fiscal year 2018-19, but this figure has already been crossed in February thies year. As against this, the average inflation was 3.92 percent in FY18 and 4.16 percent the year before. The latest spurt in inflation is mainly ascribable to the non-food-non-energy (core inflation) component. The core inflation, which is measured by excluding volatile food and energy prices, was recorded at 8.8 percent year-on-year and has been steadily rising for a couple of months despite a number of remedial measures, including tightening of the monetary policy.

At the same time, experts have noted a gradual build-up of domestic demand which has fuelled inflation in recent months. Of the 89 commodity groups of the CPI price movement in 43 items has been much faster. In February, food inflation increased by 4.5 percent on an annual basis. The prices of non-perishable food items were up by 0.35 percent, while those of perishable products fell by 10.4 percent. The food items whose prices increased the most in February included tomato (150.04pc), chilly green (37.43pc), pomegranate (11.24pc), chicken (4.17pc), fish (2.02pc), wheat (1.43pc), mutton (0.72pc), pulse masoor (0.60pc) and beef (0.57pc). Furthermore, the impact of fuel prices was also felt on most food items, as retailers passed on the impact of higher transportation costs to consumers. This impact was more pronounced in the case of milk, vegetables and meat.

On the other hand, non-food inflation went up 10.1 percent on a yearly basis, denoting that the direct impact of fuel prices on inflation was strong. The prices of non-food items also remained under pressure on account of 11.61 percent rise in the education index, followed by 6.95 percent increase in clothing and footwear and 8.54 percent in housing, water, electricity, gas and other fuels during the period under review.

The 10 percent rise in petroleum prices, effective March 1, has worsened the lot of the common man. Petroleum price increases — since fuel is the basic requirement for all sorts of businesses as well as households — invariably lead to a fresh round of chain reaction which pushes inflation upwards. Besides, there are spending and subsidy cuts, which also hit the middle and lower income groups hard.

The government has been using a combination of administrative and monetary measures to control the rising inflation. The State Bank of Pakistan (SBP) has been tightening the monetary policy in the face of rising inflation amid depreciating the rupee and high global crude prices over the past two years. Policy rates are already at their six-year high after the SBP raised the key rate by 25 basis points to 10.25 percent on Jan 31 this year. It is relevant to add that the central bank has cumulatively raised the interest rate by 4.50 percent since January last year. The State Bank, in its last quarterly, report also noted that the prices of major items such as wheat and sugar recovered from their depressed levels that had persisted during the fiscal year 2018.

The central bank, in its latest quarterly report on the state of economy released recently said: “The SBP’s inflation projection for FY19 increased further in the range of 6.5-7.5%. Following factors played a key role in this regard – a higher-than-anticipated rise in international oil prices and its pass-through to domestic fuel prices; upward revision in domestic gas prices; further increase in regulatory duties on imports in early September 2018 and continued second-round impact of previous rupee depreciations.”

As of now, we are facing a situation of stagnant earnings, low growth, and rising prices which, all combined together, is called stagflation. The days ahead are more worrying as an IMF programme is said to be under way. Some economists give more importance to the core inflation over the CPI inflation as it depicts a non-volatile pricing trend than the CPI which includes rapid fluctuations in food and energy prices.

The IMF is said to be demanding from Pakistan to commit to a further fiscal adjustment of around 2.5 per cent of the GDP along with wide-ranging structural reforms. Thies adjustment will have to be supported by an increase in electricity and gas rates as well as reining in public-sector entities to address the fiscal deficit in the system. The combined adjustment over the next two years can go beyond 3.5 percent of the GDP, accentuating the inflationary pressures.