Runaway inflation

The year-to-year rate of inflation in the consumer price index has jumped up to 21.3 percent in in June 2022. This is the highest rate of inflation after 2008-2009. Only a month ago in May it was 13.8 percent. On a month-to-month basis, the increase in the price level was as high as 6.3 percent in June, which is again a peak rate of monthly increase.

There is need to decompose the rise in the rate of inflation and identify which goods and services have experienced the biggest increase in prices. This will help in diagnosing the causes of the high and rising rate of inflation.

The first analysis is on the relative rate of inflation in food and non-food prices, respectively. The observed rates of inflation are presented for the end-months of each quarter of 2021-22 in Table 1.

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                                    Table 1
                    Year-to-Year Rates of Inflation in
                 end-months of quarters of 2021-22 in CPI
                                                                              (%)
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              June 2021   September 2021   December 2021   March 2022   June 2022
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Food            10.6          9.8             10.1            15.1           25.8
Non-Food         9.3          8.3             13.8            11.7           19.2
Overall CPI      9.7          9.0             12.3            12.7           21.3
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Source: PBS
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The acceleration in the rate of inflation has been faster in the case of food prices. Between March and June, the inflation rate has gone up by 10.7 percentage points from 15.1 percent to 25.8 percent. Non-food prices have seen an increase of 7.5 percentage points from 11.7 percent to 19.2 percent.

The CPI gives the rate of inflation in prices of 94 goods and services. There are 10 items out of 41 items in the food group which have shown an inflation rate above 20 percent in June 2022, with a weight of over 1 percent in the CPI. These ten items are as follows:

• Wheat, rice

• Onions, tomatoes, other fresh vegetables

• Fresh fruits

• Meat, chicken

• Cooking oil, vegetable ghee

The rise in the prices of cooking oil and vegetable ghee is attributable to the big escalation in the import price of edible oils. The surprise is the big jump in prices of domestically produced food items like food grains, vegetables, fruits, and livestock products. The GDP growth rates by sector in 2021-22 according to the Pakistan Economic Survey are exceptionally high at 6.6 percent in the case of important crops and even higher at 7.24 percent in minor crops. Clearly, the supply position of food items was substantially better, apart from wheat.

Why then have prices risen so much in the above-mentioned food items which are largely supplied domestically? The likelihood is that the sectoral growth estimates of 2021-22 are exaggerated both in the case of major and minor crops. There is need for the provincial governments to investigate the reasons for the exceptional jump in these food prices in recent months and take appropriate measures.

Turing to the non-food group, there are seven items out of 53 items, which have weights of more than 1 percent in the CPI and year-to-year rate of inflation in June 2022 of above 20 percent. These are as follows:

• Electricity charges

• Motor fuel, liquefied hydrocarbons, transport costs

• Washing soap

• Readymade food, marriage halls

Here, the impact of imported inflation is dominant. On top this, the precipitate drop in the value of the rupee, especially after March 2022, has contributed to a quantum jump in the domestic prices of petroleum prices, after the subsidy was withdrawn. Higher fuel costs have also contributed to the jump in electricity fuel adjustment charges and an across the board impact on goods which are transported.

Overall, the 17 items listed above have contributed two thirds to the high inflation of 21.3 percent in June. Fuel prices alone are responsible for almost 30 percent of the rise in the rate of inflation in the CPI from 9.7 percent in June 2021 to 21.3 percent in June 2022.

The fundamental question is whether the high rate of inflation will persist or gradually start falling during 2022-23. This is largely dependent, especially in non-food items on the future path of global commodity prices. The high rate of inflation on a year-to-year basis is likely to persist in prices of petroleum and products because the Government is committed to raising the petroleum levy to Rs 50 per litre by March 2023. Further, there are pending big increases in electricity and gas tariffs.

The unfortunate reality is that even though lower income households have been hit harder because of the higher inflation in food prices, the federal budget of 2022-23 does not provide much relief. The Benazir Income Support Programme has been increased in size by 46 percent to Rs 360 billion. But these cash transfers will still only be 0.5 percent of the GDP. The subsidy to the USC is only Rs 17 billion. It should have been raised to at least Rs 50 billion.

The rise in food prices despite high growth in output of both major and minor crops needs to be investigated by the provincial governments and the federal ministry of food security and research. There will be need for strengthening and implementing food price control mechanisms at the level of individual retail markets.

The SBP forecast for the rate of inflation is 18 to 20 percent. This will be the combined effect of pending increases in administered prices, higher cost of food imports, especially of wheat, and continued depreciation of the rupee in the presence of low foreign exchange reserves. Hopefully, the price of crude oil will stabilize at close to $100 per barrel due to the emerging recession in the world economy.

Copyright Business Recorder, 2022