Increase in prices

Government seems to have failed to check the rising inflation in the country. Average CPI inflation which was targeted at 9.0 percent during the beginning of the year is likely to exceed by a considerable margin to reach around 12 percent for 2009-10. According to the latest data released by the Federal Bureau of Statistics (FBS) on 12th May, average CPI was higher by 11.49 percent in the first ten months (July-April) of 2009-10 as compared to the same period of last year.
Other two indicators of measuring inflation ie Wholesale Price Index (WPI) and Sensitive Price Index (SPI) also increased by 11.26 percent and 12.96 percent respectively during this period. Most worrying aspect of price statistics was that inflationary pressures which had eased somewhat in the earlier part of 2009-10 have decisively re-emerged in the recent months as indicated by a considerable increase in CPI, WPI and SPI by 1.73 percent, 1.84 percent and 0.43 percent respectively in April, 2010 over their level a month earlier.
Inflation as measured by CPI also rose by 13.26 percent in April, 2010 as compared to the same month last year. Another depressing aspect was the fact that ordinary households were likely to be affected much more by the rising inflation than richer sections of the society due mainly to a comparatively higher increase in food prices and transportation and communication cost.
Accentuation in price pressures in the economy in the recent past could be attributed to a number of factors. These include rising international prices of many commodities amid supply shortages and some recovery in the global economy, weakening of the rupee, particularly in December 2009 and January 2010 when SBP had stopped providing forex liquidity support for oil imports and upward adjustment in administered prices of power and key fuels. A hefty increase in domestic oil prices with effect from 1st April seems to have played a significant role in raising the overall price level in the economy.
No less important was the inflationary impact of a sizable increase in money supply and stagnation in the GDP growth rate which in normal parlance is proclaimed as excessive liquidity chasing few goods. Needless to say that such a high rate of inflation (in double-digit) is very harmful for economic prospects of the country and welfare of the people. In particular, vulnerable groups are likely to be hit the hardest because of a steep increase in the prices of food items on which a major part of their household incomes are spent.
Because of certain peculiar reasons, high inflation is also called the worst form of taxation due to its high and inequitable burden on the poor. Exchange rate of the rupee could depreciate further and the State Bank would be forced to maintain or even strengthen its tight monetary stance in the coming months to contain the rising inflation.
The impact of such a monetary policy is obvious for the growth rate of the economy. Government could have a temptation to control the prices through administered measures but such a strategy is usually counter-productive. Unfortunately, there are no easy solutions to soften the price pressures in the economy. While external factors impacting on the rate of inflation are beyond the control of the government, domestic policies in this regard are equally difficult to implement.
For instance, it is very important at this juncture to contain liquidity much below the rate of nominal growth of GDP and release resources for the productive sectors of the economy to lower the rate of inflation but such a policy thrust is very difficult to follow due to high budget deficit and the need of the government to finance the fiscal imbalance by resorting to bank borrowings.
The options for raising government revenues are limited while public expenditures are rising steeply due to a variety of reasons including the ongoing war on terror. Difficulties of the government could be visualised from the level of resistance it is facing to impose VAT or withdrawal of subsidies on certain items.
Overall, we realise the difficulties of the government to contain the rise in prices within tolerable limits but this is such an important area of economic management that no efforts should be spared to ensure that the rate of inflation is reduced to a single digit, preferably around 5 percent, in a couple of years.