Pressure on prices

There is clear evidence that the price situation in the country is coming under increasing pressure. According to the latest price data released by the Federal Bureau of Statistics on 10th February, the Consumer Price Index (CPI), a key indicator of inflation, was up by 13.68 percent during January, 2010 over the same month of the previous year, while the Sensitive Price Index (SPI) and Wholesale Price Index (WPI) also recorded increases of 18.35 percent and 19.64 percent respectively during the same period.
The rise in CPI was attributable largely to a considerable increase in the sub indices of food and beverages (+15.49 percent), house rent (+13.38 percent), fuel and lighting (+20.19 percent), transport and communication (+9.43 percent) and education (+13.68 percent). Acceleration in the inflation rate in January, 2010 could easily be perceived by the fact that the rise in CPI, which had dropped to 8.9 percent in October, 2009, has bounced back to 13.68 percent during January 2010.
Also, the CPI has increased by 2.42 percent during January 2010 in contrast to a decline of 0.49 percent in the previous month, while the SPI and WPI also recorded higher increases of 2.88 percent and 4.23 percent as compared to 0.66 percent and 0.20 percent respectively in December, 2009. During the first seven months of the current fiscal year (July-January, 2010), the CPI registered an increase of 10.79 percent over the corresponding period of 2008-09.
The latest trend in prices is, of course, a discouraging development. At the beginning of FY10, the government had projected an inflation rate of 9.0 percent, but the behaviour in prices, in the recent months, suggests that the target is not likely to be achieved. The State Bank in its latest Monetary Policy Statement (MPS) had estimated the CPI inflation to remain between 11 and 12 percent for the current year, but that was before the price data for January, 2010 was available.
Unfortunately, the inflation uptrend is likely to accelerate further in the remaining part of 2009-10. The recent hike in petroleum, gas and electricity prices, together with the depreciation of the exchange rate of the rupee and lower availabilities in the economy, due to sluggish growth rate, would certainly fuel inflationary tendencies in the economy and make the lives of ordinary citizens much more difficult.
In fact, rising prices, unemployment and poverty usually make a deadly combination to unleash forces that could create chaos and lawlessness in society and undermine the prospects of the economy for a long time to come. Higher inflation is not only highly unfair for the ordinary people, but also has negative repercussions for investment, growth and the external sector.
Anyhow, there could be no disagreement that it needs to be brought down to a single digit, preferably below 5 percent, as soon as possible and all policies need to be geared to achieve this objective. While international commodity prices, impacting on domestic inflation, are outside the control of the government, the authorities need to concentrate on monetary and fiscal policies to curtail overall demand in the economy.
Fiscal policies, in particular, need to be highly restrictive but, given the exceptional circumstances arising from the stepped-up campaign against the militants, the rehabilitation of internally displaced people and the weaker growth in tax collections, due to lower industrial and trade activities, the pursuance of such a stance is becoming increasingly difficult.
Monetary authorities of the country continue to follow a stringent monetary policy to ease inflationary pressures but such a policy strategy has its own implications and limitations. A higher growth rate in the domestic economy or decline in international commodity prices, which could soften inflationary pressures, also do not seem to be on the cards.
Administrative measures, including rationing etc adopted sometime by the government, generally prove to be counter-productive. In this kind of situation, all of us could only pray for certain favourable factors to emerge for easing price pressures in the economy, but need to brace for some difficult times, which appear to be our fate, at least for the time-being.