Dip in the rate of inflation

There has been a visible and welcome slowdown in the rate of inflation in February 2024. The year-to-year rate of inflation has come down from 28.3% in January to 23.1% in February 2024. There was also a drop in the rate of inflation in January from 29.7% in December 2023. As a result, cumulatively over the last two months there has been a sizeable drop in the rate of inflation of 6.6 percentage points. There is, therefore, a need for identification of the nature and pattern of drop in the rate of inflation. This will enable a determination of the causes of the fall.

The first part of the analysis is the determination of the drop in food prices and non-food prices, respectively. There has been a 6.4 percentage point fall in the overall food price index rate of increase on a year-to-year basis. It was 26.7% in January 2024, which has fallen to 20.3% in February 2024.

A smaller fall is observed in the rate of inflation in non-food prices. It was 29.4% in January 2024, which has come down to 24.5% in February 2024. Therefore, the fall is 4.9 percentage points, which is significantly less than the decline in the rate of inflation in food prices. This is a welcome development and efforts must be made to sustain the lower rate of inflation in food prices and, if possible, even lower it further. This will reduce the negative impact of inflation especially on the poor households in the country.

However, there is one statistical issue which needs to be resolved. Is the dip in the rate of inflation partly due to a ‘high base’ effect? This does appear to be the case. The rate of inflation in February 2023 had upsurged to a high rate of 31.5%, from 29.6% in January 2023. Clearly, the moderation of the rate of inflation in February 2024 also reflects a ‘high base’ effect.

The other question is whether the level of the consumer price index has risen or fallen from January 2024 to February 2024. It has actually remained almost exactly unchanged. Therefore, there is no relief in terms of a fall in the overall price level.

There is a need to also make a comparison of the trend in the consumer price index with that in the wholesale and sensitive price indices. The wholesale price index has shown an even bigger drop from 27% in January 2024 to 18.7% in February 2024. Therefore, perhaps surprisingly, there has been some increase in the profit margin of retailers.

The Sensitive Price Index has also shown a bigger fall in the rate of inflation. It was 36.2% in January 2024 and has declined to 30.4% in February 2024. This is again some good news as the Sensitive Price Index has items, which have a relatively higher weight in the consumption spending of lower income groups.

The contribution of the drop in food prices is 45% to the overall drop in the rate of inflation. This is significantly higher than the overall weight of 34.6% of food items in the Consumer Price Index.

There is a clear pattern in the fall in the rate of inflation in food prices. The biggest declines are observed in poultry products. For example, the rate of inflation in the price of chicken has come down from 23.5% to only 2.6%. Similarly, the rate of inflation in the price of eggs has fallen sharply from 42.4% to only 0.3%.

The other goods where there has been a moderation in the rate of inflation are vegetables, including potatoes, tomatoes and other vegetables. The rate of increase in the price of tomatoes was exceptionally high at 154.4% in January 2024. This has come down to 114.5% in February 2024.

The next big contribution to the moderation in the rate of inflation is by gas charges. This tariff is alone responsible for 34% of the reduction in the rate of inflation in February 2024. The year-to-year increase in the gas tariff was reported at 520% in January 2024, which has come down to 353% in February, due to a rise in the tariff in February 2023.

However, the PBS (Pakistan Bureau of Statistics) had originally reported, after the quantum tariff increase in November 2023 that the rise for the bottom quintile was as high as 1109%. This has been brought down to 353% in February 2024. Clearly, there is need for the PBS to check the consistency of these estimates.

Based on the above analysis of the extent and the pattern of the dip in the rate of inflation, it is possible to identify reasons for this moderation in the rate of inflation.

The move towards lower inflation in food prices is a reflection of the improved production and supply situation in the agricultural sector, with the on-going process of recovery after the floods of 2022. This had led to an upsurge in food prices over 50% in rural areas after February 2023.

The other apparent reason for the coming down of the rate of inflation is the new-found stability in the value of the rupee. This has substantially reduced the component of imported inflation. For example, the year-to-year rate of increase in the price of tea was 43% in January 2024 which has come down to 32% in February 2024. Similarly, the rise in the price of motor fuel is reported at only 5.7% in February 2024, as compared to 19% in January 2024.

The prospect is for the year-to-year inflation in coming months to continue moderating somewhat due to the ‘high base’ effect of inflation in the months of March, April and May 2023 of 35.4%, 36.4% and 38% respectively.

However, the recent and forthcoming electricity tariff increases may lead to more cost-push inflation. The seven-month average of the rate of inflation in 2023-24 is 28%. Hopefully, this monthly average will come down to 24% by the end of 2023-24. However, even at this rate it will remain relatively high and the seasonal upsurge during the month of Ramadan could raise it significantly.

Copyright Business Recorder, 2024