NationalVOLUME 15 ISSUE # 05

Rising inflation

There has been no let-up in the pressure on prices as the inflation rate rose to 11.4pc in September 2019. As per available data, inflation spiraled up due to a hike in food and energy prices.

According to the Pakistan Bureau of Statistics, the pace of inflation, measured by the Consumer Price Index (CPI), increased to 11.4pc in September over a year ago, registering an increase of 0.9pc as compared to the previous month.

However, the core inflation – measured by excluding the impact of food and energy prices – slightly decelerated to 8.4pc in urban areas and remained static at 8.8pc in rural areas of the country. Average inflation in the first quarter of the current fiscal year stood at 10.08pc compared to 6.1pc in the same period of the previous year.

Food inflation in both urban and rural areas increased by 15pc as compared to a year ago while non-food inflation remained in single digit at 9.7pc in urban areas and 8pc in rural areas. Out of 19 major items that saw an increase in September over last year, 14 were related to food in the urban areas. Contrary to expectations, the central bank’s tight monetary policy has failed to positively impact the prices of food items, which are increasing because of supply issues, increase in sales tax and the monopoly of a few businesses. The maximum increase was recorded in gas prices, which soared by 114.64pc in urban areas followed by 108.7pc surge in the prices of onion, 79.4c in chicken, 46.8c in moong pulse, 38pc in cigarettes, 37pc in sugar, 36.2pc in potato and 22pc in petrol. Cooking oil prices increased by 20.3pc, construction inputs 19pc, vegetable ghee 18.3pc, tea 16.4pc, doctor fee 15.8pc, meat 12.7pc, wheat flour 12.3pc and transport services 11.5pc.

As usual, there is a variation in the rates of urban and rural inflation. In September, inflation in urban areas recorded an increase of 11.6pc while in rural areas, it rose to 11.1by as compared to a year ago. As per SBP projection, inflation is going to decline in the coming months.

As noted by analysts, the increase in sugar prices once again underlines the problem of monopoly in the sector that the PTI government has not been able to break due to its influence in the corridors of power. While analyzing inflation figures, one must keep in mind the change in the SBP policy of setting the monetary rate.

As against the earlier policy of setting the monetary policy rate while keeping in view the core inflation, the SBP has now shifted to the projection for headline inflation for determining the policy rate. Thus, it has projected the headline inflation in the range of 11-12pc and set the interest rate at 13.25pc. In other words, had the central bank not changed its policy, there would have been a strong case to cut the interest rate due to stable core inflation in the past three months.

It is important to note in this connection that the September inflation rate was in line with the central bank’s inflation projection. Last month, the government had changed the inflation calculation methodology and the 11.4pc rate has been calculated on the basis of the new methodology. When calculated with the old methodology and old base year of 2007-08, the rate of inflation in September would be 12.55pc. However, on the basis of both methodologies, the rate of inflation is increasing.

The chief economist of the central bank recently said that inflation would start receding from the second half of the current fiscal year. No doubt, controlling inflation is high on the agenda of the government of the Pakistan Tehreek-i-Insaf (PTI) government of Prime Minister Imran Khan, but the steps taken for the purpose have not yielded desired results.

In this context, a special panel of the National Assembly, set up to suggest measures to contain inflation, has called for stability in the exchange rate, reduction in the monetary policy rate, the introduction of a meaningful cut in current expenditure, reduction in indirect taxes on basic consumption goods and reduction in utility prices. The special panel has also criticised the policy of attracting hot foreign money by keeping the interest rate “artificially high”. Needless to say, if the government follows some of the suggestions of the National Assembly panel, the inflation rate can be brought down substantially.

According to economic experts, there is a lot of scope to bring down the policy rate from 13.25pc, since the core inflation has hovered at around 8.5pc for some time. This view of the situation is endorsed by the fact that core inflation stood at only 8.4pc in September. The real interest rate, when worked out on the basis of core inflation, is higher by 4.9pc.

The rising prices of essential articles have upset the budget of average households in the country. It is time the government moved to provide some relief to the people.