According to the latest official figures, inflation is on the decline and prices are falling. Over the past few months, the rate at which the prices of goods and services in the country have risen has slowed significantly. Headline inflation fell to  a 44-month low of 6.9pc last month.

Many complex factors are involved in the situation. One important reason is that the present decline is set against a high-base effect from last year when annual inflation stood at 31.4pc. Other factors include plunging global oil and commodity prices, a stable exchange rate, falling demand due to eroding real wages, strong monetary tightening policies with very high interest rates. Data from the Pakistan Bureau of Statistics shows that both core inflation and the three-month average inflation rates, although higher than CPI inflation, have fallen to single digit, signalling a substantial easing of inflationary pressures. The narrowing gap between the CPI and core inflation — which excludes energy and food prices — also indicates a slowdown in imported inflation.

Following the improvement in the inflation outlook, the  State Bank of Pakistan has reduced borrowing costs by 450bps to 17.5pc since June this year. It is expected that after the latest CPI reading the State Bank of Pakista will decide to further reduce the  interest rates in November and December. In this context it is relevant to add here that the government recently bought back its costly debt of Rs351bn maturing in December from the commercial banks at the much lower rate of 16pc compared to the 20pc-21pc at which it was originally sold. This means that the government is all prepared to effect further cuts in the policy rates in the months ahead.

However, on the downside there are many risks and challenges lurking below the surface. Oil prices may surge due to a rise in tension in the Middle East. At the same time the pace of economic recovery in the country is too slow and is little reflected in the daily lives of the common people.economic recovery at home.

The prices of goods and services available to the people continue to rise even as the inflation rate falls below 7pc. Overall, the cost of living is increasing, though perhaps not as rapidly as earlier, showing that even when the inflation rate decreases, the prices do not go down accordingly. For the middle-class people, electricity charges, grocery expenses, school fees, and hospital bills remain a pain in the neck.

For the common man, the biggest problem is the constant rise in food prices  Over the last few years, food inflation, as measured by the Pakistan Bureau of Statistics, has accumulated to more than 114 per cent, compounding by 22pc on an annual basis and exceeding overall inflation levels. Food inflation plays a crucial role in determining wages, as expenditure on food makes up more than 50 per cent of the poorest quintile and 45 percent of  the subsequent quintile, as per the Household Integrated Economic Survey 2018-19.

As food expenditures take up almost half of any household’s income, there is little room for expenditure on other essentials, resulting in households reducing expenses on health and education. So, containing food inflation and ensuring price stability is important if real inflation is to be controlled. A review of the consumption basket of the poorest quintiles shows that almost 28pc of all food-related expenditure is on dairy products and poultry, followed by cereals at 15pc, vegetables at 9pc, and edible oil at 7.5pc. Due to a distortionary support pricing regime in wheat, the increase in the price of wheat over the last five years has mimicked the depreciation of the rupee-dollar parity, signalling the price setting at import parity levels due to smuggling.

It is also well known that any weaknesses in the supply chain exacerbate food inflation. Seasonal volatility in prices of tomatoes, which over the last fifteen months has fluctuated violently clearly demonstrates the supply constraints associated with perishable goods. Food inflation cannot be contained by blunt monetary policy tools and can only be fixed through improvement in supply linkages, yield improvement, and affordable storage solutions. Fixing prices often makes things worse, as any surplus is smuggled when international prices are high or rots when international prices are low, resulting in a loss in consumer welfare in both cases.

In the larger context, if inflation is to be controlled  on a permanent basis, there is a need for sustainable economic growth and a much faster increase in real incomes that outpaces inflation. Equally important is for the government to curtail its excessive expenditure and adopt a regime of austerity to set an example for the common people to follow.