Rise in inflation

After showing a declining trend in the past two months, the rate of inflation has risen again during March, 2011. According to the latest data released by the Federal Bureau of Statistics (FBS), the rate of inflation, as measured by the Consumer Price Index (CPI), which was 15.0 percent in December, 2010 had fallen to 14.2 percent in January, 2011 and 12.91 percent in February but has gone up to 13.16 percent in March, 2011 on a YoY basis.
The trend on a monthly basis was even more discouraging. During March, 2011, the CPI and SPI jumped by 1.48 percent and 0.79 percent in sharp contrast to a decline of 0.74 percent and 1.13 percent respectively in February, while the WPI shot up by 3.34 percent as compared to 1.87 percent in the previous month. The average rate of inflation was also much higher during the current year than in FY10. During July-March, 2011, the CPI, SPI and WPI recorded average increases of 14.20 percent, 18.64 percent and 22.97 percent as compared to 11.29 percent, 12.54 percent and 10.08 percent respectively in the corresponding period last year.
Since the present change in the WPI is generally considered as an indicator of future inflation, more than double the increase in WPI during the current year as compared to the same period in FY10 is a signal that price pressures in the economy could accentuate in the coming months.
Another worrying aspect was that the prices of food items, on which ordinary households spend a large part of their budgets, have risen at a faster rate than other commodities and services. During March, 2011, the sub-index of "food and beverages" was higher by 17.97 percent than its level a year ago, followed by medicare (+13.55 percent), "apparel, textile and footwear" (+13.47 percent), "household, furniture and equipment" (+11.60 percent) and "transport and communication" (+10.59 percent).
The latest trend in inflationary pressures is disturbing for a number of reasons. Some deceleration in the rate of inflation in the previous two months was largely due to the government freeze on oil and electricity prices, but such a policy does not seem to be feasible anymore due to the consistent increase in international oil prices and the inability of the budget to sustain the continued haemorrhage of increasing level of subsidies on this account.
Increase in the domestic prices of oil w.e.f. 1st April, 2011, upward adjustment in electricity tariffs, higher prices of food items all over the world and latest taxation measures to improve government revenues are some of the factors that would further push up the rate of inflation in the coming months. Ballooning fiscal deficit, forcing the government to borrow heavily from the State Bank and contributing to excessive demand in the economy, coupled with a stagnant growth rate also continue to fuel inflationary pressures.
Anticipating certain positive developments, the government had projected the average inflation rate at 9.5 percent in the beginning of the year, considering the latest trends, it could actually be around 15 percent during 2010-11. The erosion of purchasing power of nominal incomes by such a magnitude would not only be highly unfair for ordinary people, but could also have negative repercussions for savings and investment, overall growth and the external sector of the economy.
In particular, one could easily visualise the miseries of the poor and ordinary people who spend most of their incomes on food, the prices of which have risen quite steeply in the recent past. Unfortunately, policies that could soften the rate of inflation and are within the jurisdiction of the government are not properly followed due either to lack of resolve or stiff resistance by the political parties and vested interests.
While exogenous factors contributing to inflation are outside the control of the government, the fiscal position of the government could be improved to contain overall demand and distortion in certain policies could be removed to reduce price pressures in the economy.
For instance, the support price mechanism of the government needs to be either discontinued for the time being or substantially reformed at least in the case of wheat in order to provide relief to the common man and increase the chances of exports when the country is expected to harvest a bumper wheat crop this year and there is not enough space in the godowns to stock the surplus. We are afraid that if a proper policy framework is not designed by the government in consultation with the other stakeholders, including the opposition parties to contain the fiscal deficit, improve energy supplies, address the law and order problems etc, the inflationary pressures, with all their ugly consequences, would continue to jolt the country.