Inflation outlook

The State Bank of Pakistan is in agreement with most of the economic analysts in the country that inflationary tendencies in the economy could accentuate in the coming months. According to its latest Inflation Monitor, it was for the first time in February during the current year that both the Consumer Price Index (CPI) and the Sensitive Price Indicator (SPI) had decelerated for three straight months largely due to stability in domestic oil prices and easing of prices of food items like potatoes, tomatoes, onions and vegetables.
Both the CPI headline inflation and SPI dropped from 14.2 percent and 18.4 percent in January to 12.9 percent and 16.2 percent respectively in February on a year on year basis. The Inflation Monitor also revealed that out of 35 cities, 22 experienced over 12.9 percent inflation (average inflation) during February, while 19 cities had recorded higher than average inflation (13.0 percent) in the corresponding month last year.
According to detailed analysis, Kunri (Sindh) observed the highest food inflation (23.8 percent) whereas the second largest city in the country, Lahore observed the lowest food inflation (12.8 percent) during February. Karachi witnessed a 16 percent food inflation and a 6.4 percent non-food inflation during the month. Nonetheless, the most depressing news was that the three lower income groups had faced higher inflation than overall inflation in February.
Speaking about the outlook on inflation, the SBP was of the view that the declining trend in prices witnessed recently might be reversed in the months ahead considering the recent increase in domestic prices of petroleum products, upward adjustment in electricity tariffs, rising building material prices and latest taxation measures to improve government revenues.
Although the Inflation Monitor of the State Bank is neither widely publicised nor used normally in economic analysis, yet we feel that the observations and remarks contained in its latest edition need to be noted carefully with a view to deal appropriately with the unfolding situation.
However, to start with, it must be highlighted that deceleration in inflation seen in the recent past is not something to boast about or worthy of great applaud. Decline in the rate of inflation in the past few months is due primarily to base effect and, lest we forget the fact, that inflation in the country is still in double-digit.
Also, some deceleration in the rate of inflation was registered because the government was forced by the opposition parties and its coalition partners to keep the domestic oil prices unchanged. This could, therefore, be only a transitory phase and the government would try its utmost to pass on the full impact of international oil prices to the domestic market as soon as it gets the chance in order to reduce the level of subsidy in the budget.
All of this means that there is no respite for the common man who mostly has to bear the brunt of rising prices. Another disturbing aspect is that the rate of inflation is likely to increase in the coming months due to the factors given by the State Bank in its analysis. In other words, the miseries and deprivation of the ordinary people are likely to compound at a time when employment opportunities are shrinking due to lower level of business activity in the country.
Unfortunately, exogenous factors and domestic developments have both combined to contribute to this ugly scenario of rising prices at this juncture. High import prices, particularly of oil, a very low growth rate and injection of high doses of liquidity in the economy due to mounting fiscal deficit are some of the major reasons behind the present and projected high rate of inflation.
While the authorities in Pakistan cannot do much about exogenous factors, there is an urgent need to increase availabilities in the economy through a higher growth rate and contain domestic demand to a reasonable level by improving fiscal position of the country.
All of this, however, is easier said than done but there are no easy options when the jinn or genie of inflation is already out of the bottle and is likely to remain so for a considerable length of time. We can only urge upon all the political parties to join hands for a common cause that is so important for the welfare of the people of the country.