Rise in inflation

The latest price indices released by the Federal Bureau of Statistics are highly disturbing. According to its data, the Consumer Price Index (CPI) during July 2004 was up by 9.33 percent compared to its level a year ago.
The rise in Sensitive Price Index (SPI) and Wholesale Price Index (WPI) was even more alarming at 13.84 percent and 10.19 percent respectively. Comparison with previous month's data was also no less frightening.
The CPI registered an increase of 1.38 percent in July 2004 over June 2004 while SPI and WPI jumped by 2.43 percent and 4.20 percent respectively during the same period. Price index of food and beverages, which constitute over 40 percent weightage in CPI, rose by 14.93 percent in July 2004 over July 2003, and was the main reason for acceleration in inflation.
Compared with the inflation numbers of the last several years, the increase in CPI was the highest and gives a fairly good idea how fast inflation has tended to rise recently.
Though a big increase in inflation in a single month does not necessarily mean that full year inflation would also be very high yet it is certainly ominous of a highly negative development in the economy.
It could well be argued, by implication, that nothing much was done to keep inflation in check and the worrying price statistics now available is the result of mistaken policies in the past. Seen closely, such an assertion seems to be true.
Since 2001-02, liquidity in the economy has been growing at a much faster rate than the target fixed in the beginning of each year and the monetary overhang in the economy is bound to show its effect with a time lag.
Also, within the monetary aggregates, currency in circulation and demand deposits, which carry a relatively higher potential for inflation, have claimed a larger share of expansion in liquidity.
We have been warning the authorities about the developing scenario but nothing much was done to check high growth of money supply. Even now, the State Bank is refraining from raising interest rates to levels that could adequately take care of inflationary impulses. It has also to mop up liquidity from the market in a big way to contain the credit creating capacity of the banks.
The State Bank, however, is so certain about its present monetary stance being correct that on 12th August 2004, the Governor explained that year-to-year inflation is different from the annualised rate of inflation, the price indices would come down with correction in wheat and oil prices and the central bank would not revise its forecast of 5 percent inflation during 2004-05.
In our view, the confidence of monetary authorities that inflation could be contained within the target of 5.0 percent and there is not much cause of concern is, to say the least, rather misplaced.
Though the State Bank has recently started a gradual tightening of monetary policy as indicated in its monetary policy statement, most analysts are of the view that the pace of tightening is too slow to make a real impact on the rate of inflation.
We can understand the hesitation of the State Bank to act boldly on the interest rate front because of growth considerations but if inflation is not tackled properly and in time, it could have a devastating impact on the lives of ordinary people in the country.
The misery could be more severe than suggested by the CPI due to the fact that price indices in Pakistan are generally believed to understate the rate of actual inflation and food prices which are more relevant and critical to the plight of poor people, are registering higher increases.
Another factor, which cannot and should not be over looked is the government's present policy not to allow domestic oil prices to rise in response to soaring international prices since May 15, 2004 by reducing its petroleum development levy (PDL). Sooner or later, most probably after Shaukat Aziz's election to the Prime Minister's office; this absorption of price increase for political mileage would be discontinued for budgetary reasons.
Once domestic oil prices are allowed to increase which is almost inevitable, it would accelerate the rate of inflation further by directly increasing the cost of fuel/energy and transportation and by indirectly raising the prices of almost all of 374 goods and services in the CPI basket.
Keeping all these factors in view, we would again urge the State Bank to undertake appropriate measures and well in time to contain the rate of inflation within the specified target because it is a matter of very serious concern for majority of the people in Pakistan.
Price data for the first month of the current fiscal is, in our view, the first unambiguous knock on the door of policy makers' chambers that something is amiss somewhere.