Rise in inflation

It is quite depressing to see that the rate of inflation which was previously in control is on the rise once again. According to the latest data released by the Federal Bureau of Statistics (FBS), the headline inflation as measured by the Consumer Price Index (CPI) was clocked in at 4.17 percent in April, 2016 as compared to 3.9 percent in the preceding month following a sharp increase mainly in prices of pulses and gas. An additional upward pressure also came from a hike in prices of clothes and footwear, housing, water, electricity, fuel, health, transport and furnishing equipment. The price of pulse gram increased by as much as 59.94 percent in April, 2016 over April, 2015, mash's 56.19 percent, basen's 51.73 percent, gram whole's 31.68 percent and masoor's 8.76 percent. Core inflation, measured by excluding volatile food and energy prices, was recorded at 4.4 percent in April, 2016 which was slightly lower than 4.7 percent in the previous month. It may be mentioned, however, that core inflation had remained subdued since November last year. The CPI on a monthly basis also jumped by 1.6 percent in April, 2016 as against 0.2 percent in the previous month. Nonetheless, average inflation for the July-April, 2016 period now stands at 2.79 percent as compared to 4.81 percent in the last fiscal year but lower level of inflation during the current year mainly reflects subdued inflation in the earlier part of FY16 and the base effect.
Although the rate of inflation during 2015-16 could still be lower than the targeted level of 6 percent, the recent surge in prices should be a matter of concern for country's policymakers. This is especially so because employment opportunities in the country are not expanding and there is hardly any chance for a commensurate increase in incomes of ordinary people. It is of course not difficult to visualise the miseries of the poor who spend a large part of their incomes on food items like pulses and tomatoes. The impact of an increased rate of inflation on other areas of the economy is also obvious. The saving rate of economy which is already at an abysmally low level could go down further, resulting in lower investment and poor prospects for economic growth in the coming years. Exchange rate of the rupee is also bound to depreciate due to higher inflation in Pakistan than other countries and this could ignite more inflationary pressures. Current account deficit may also widen further and this would be unfortunate at a time when the IMF programme is going to end and US senators are opposing the flow of assistance to Pakistan on various pretexts.
Inflationary impulses in economy could, however, be tamed by resorting to measures like a visible reduction in the budget deficit to sustainable levels, introduction of steps aimed at ensuring policy continuity, removal of energy shortages, further improvement in law and order situation and good governance. As Prime Minister Nawaz Sharif has himself said in his recent speeches, political instability could play havoc with country's economic prospects. The present high political temperatures in the country caused by the Panama Papers need to be lowered to accelerate economic activity and initiate proper reform efforts, particularly on the fiscal side, which are difficult to initiate in such an environment. In brief, measures are needed both to contain aggregate demand and spur economic growth in order to increase availabilities in the economy. Overall, we feel that though the current rate of inflation is still at a tolerable level, the government needs to keep a close watch on the emerging trends and undertake necessary actions to ward off the possibility of a surge in inflationary pressure over the next few months. The temptation to control prices through administrative measures, however, should be avoided at all costs. The adverse impacts of such an action are not difficult to understand.