Rising inflation

The last four months have witnessed a rising trend in the rate of inflation. It has reached a double-digit rate of 11.5 percent in November. In August it stood at 8.4 percent. There is the likely prospect of a further increase in the rate of inflation in coming months.

A double-digit rate of inflation was last witnessed in March 2020. There is also the need to highlight the extremely high month-to-month rate of inflation of 3 percent. This is the highest since April 2018 when the base year of the CPI was changed from 2007-08 to 2015-16.

An explanation for the high rate of inflation can be obtained by identification of which goods and services have experienced the largest increase in prices and made a relatively large contribution to inflation.

The first observation is that the pattern of inflation has changed substantially. The contribution of food prices has decreased, and the rate of increase was 10.5 percent, significantly less than the overall rate of inflation. This is in contrast to November 2020 when food prices rose by over 15 percent, as compared to the overall rate of inflation of 8.3 percent. Therefore, the impact of this round of inflation is relatively less on the lower income groups.

Two product groups have contributed more to inflation in November than their weight in the CPI. The first group is housing and utilities with an inflation rate of 14.8 percent. The second group is of transport with a rise in prices in November of 24.4 percent.

Within the former group the biggest increase in prices is observed in the case of electricity and liquefied hydro-carbons of 47.9 percent and 80.3 percent, respectively. Within the transport group the largest increase is in the price of motor fuel of 40.8 percent.

Despite the rise in the rate of inflation, there is evidence that it continues to be understated. The first problem is with the rate of increase in housing rents reported by the PBS (Pakistan Bureau of Statistics) of only 6.6 percent. The long-term trend is for housing rents to rise, more or less, in line with the overall rate of inflation, especially when construction costs are rising rapidly.

During the last five years the shortage of housing has increased to over 4 million units. Therefore, it is likely that the rise in rents is closer to 10 percent. Given the highest weight of over 19 percent, this increases the rate of inflation in November 2021 by 0.6 percentage points.

The other understatement is in the rate of increase in electricity charges. According to the data annexure to the monthly price statement for November, the increase in electricity charges is reported as 72 percent. However, in the estimation of the rate of inflation it is taken as 47.9 percent. This implies an understatement in the overall inflation of 1.1 percentage points.

Therefore, the overall understatement of the rate of inflation is 1.7 percentage points. The inflation rate is closer to 13.2 percent in consumer prices.

There is another reason for the perception that the rate of inflation as measured by the CPI is understated. The two other price indices, SPI and WPI, have rates of inflation of over 27 percent and 18 percent respectively.

The WPI shows the rise in food prices of 15.8 percent as compared to 10.5 percent by the CPI. There is a lag in the transmission of prices from the wholesale to the retail level. As such, the rise in retail food prices is likely to be faster in coming weeks.

Extremely big increases in wholesale prices are observed in a number of items. The price of cotton has gone up by more than 80 percent, despite an apparently bumper crop. This will affect the competitiveness of Pakistan’s textile exports in coming months. Already, the wholesale price of cotton yarn has gone up in the domestic market by 45 percent.

The other big increases in wholesale prices are in petroleum products of 62 percent to 100 percent, in fertilizer of 46 percent, and in steel products of 64 percent. This does not auger well for the prices of electricity and agricultural products. Also, the costs of construction have risen substantially thereby restricting the volume of construction activity.

There is no doubt that a large part of the inflation is imported in nature. However, the same exposure to higher international prices by other South Asian countries has not led to a corresponding big jump in the rate of inflation in these countries as in Pakistan. Why is this the case?

The first explanation is the variation in the rate of depreciation in the national currency. While the Pakistani Rupee has declined by over 10 percent between November 2020 and November 2021, the fall in the value of the currencies of India, Bangladesh and Sri Lanka has been 2 percent, 1 percent and 8 percent, respectively. The second reason is that other South Asian countries have shown a faster rate of recovery in national output, thereby leading to greater improvement in supply conditions.

The outlook for inflation in Pakistan in coming weeks and months is worrying in nature. The presentation of a heavy dose of indirect taxation in the forthcoming mini-budget along with monthly increases in the petroleum levy and higher electricity and gas tariffs means that inflation could remain double-digit and rise to 13 percent to 14 percent.

Unfortunately, the people of Pakistan will have to contend with further increases in prices, especially of food, transport, and utilities. The ability of the Government to provide relief to the poor is very limited due to budgetary constraints.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021