Inflation — a world phenomenon

Consumers around the globe are experiencing higher prices for commodities and services. The reasons for this may vary from country to country but the underlying reason is that Covid-19 led to supply chain bottlenecks, turbulence in supply and demand mechanism and high cost for energy and fuel, contributing to a hike in commodity and service prices.

The consumers in the US and Europe for long enjoyed a stable price index with insignificant inflation. But this no longer holds true. In the US, the Consumer Price Index (CPI) increased by 6.2 percent in October compared to a year ago, the largest increase since 1990.

The eurozone experienced an inflation of 4.1 percent — the highest in 13 years. The United Kingdom witnessed in October a 4.2 percent increase in CPI over last year — the highest rate in 10 years.

Asia experienced rising energy and raw materials prices. China and Japan did better with China at 1.5 percent rise in CPI while consumers in Japan felt only an insignificant price increase. The International Monetary Fund (IMF) foresees consumer prices rising around 4.8 percent globally, whereas the United Nations estimates that prices could rise between 2.2 and 7.5 percent for less developed nations that are import-dependent and most vulnerable to global market shocks.

Headline inflation is projected at 9 percent in Pakistan, 4.35 percent in India and 5.56 per cent in Bangladesh. Although these inflation rates may have the optics of being in line with developed nations, the reality is different. The consumers in developed countries with higher GDP per capita and availability of social security provided by the state are far less vulnerable to global economic shocks as compared to consumers in countries with meagre GDP per capita and lack of reliable social security by the state.

The GDP per capita of Pakistan is around $1,543, India’s at $2,191 and Bangladesh’s at $2,554.

The real issue for Pakistan is its low GDP per capita which makes its consumers most vulnerable to the slightest economic shock. Also, the nation’s economy remains largely dependent on imports of energy inputs, plant and machinery and commodities. Successive governments have been releasing subsidies and granting sales tax exemptions to compensate for high prices of basic food commodities. With the IMF programme it is getting more difficult.

Perhaps the biggest challenge for the incumbent government is to manage inflation and provide means to its citizens — specially the middle and lower segments of population — to enhance their incomes — as they are the worst hit people. Subsidies and tax exemptions are not a sustainable solution; nor are they desirable.

(The writer is a former President, Overseas Investors Chambers of Commerce and Industry)

Copyright Business Recorder, 2022