Dip in the rate of inflation

The year 2020-21 has been an eventful year. The first attack of Covid-19 ebbed by early July 2020 but was followed by two successive attacks. The third attack reached a peak in mid-April 2021 and has fortunately since subsided.

The economy demonstrated a significant recovery during the year, attaining a growth rate of almost 4 percent. However, the rate of inflation remained high throughout the year and reached a peak of 11.1 percent in April 2021. The month of June has brought the good news of a significant dip in the rate of inflation to a single-digit rate of 9.7 percent. This includes the positive developments of; first, a big fall in food inflation from 16 percent in April to almost 10 percent in June. Second, the rural and urban rates of inflation have come much closer to each other.

However, in contrast to the lower inflation in the Consumer Price Index (CPI) there has been upsurge in the rate of increase in the Wholesale Price Index (WPI). The latter has accelerated from a low of 4.3 percent in September 2020 to an extremely high rate of 20.9 percent last month.

The question is how long will it take for higher wholesale prices to be transmitted to higher retail prices? For example, the average rate of inflation in retail prices of vegetables was only 1 percent in June, compared to 14 percent in wholesale prices. Similarly, the wholesale prices of construction inputs have shot up sharply, to almost 12 percent in the case of cement, 13 percent in bricks and almost 20 percent in steel products. But the retail prices of construction inputs are up by less than 8 percent.

There are also some inconsistences in the measurement of the rate of inflation in consumer prices. For example, PBS reports in the Statistical Annexure that the electricity tariff was Rs 5.98 per kwh in June 2021, as compared to Rs 3.70 per kwh in June 2020. This implies a rate of inflation of 61.6 percent. But it is reported at 21.1 percent in the table on Index Numbers of Commodity Groups and Commodities. This alone leads to an understatement in the rate of inflation of 1.8 percentage points in the urban areas and by 1.4 percentage points in rural areas. This raises the overall rate of inflation by over 1.5 percentage points. Therefore, the big question is whether there has been an understatement of the rate of inflation in June 2021 and that it is 11.2 percent and not 9.7 percent as reported?

There is another big factor, which can be referred to as the ‘chicken price’ effect. The good news is that the price of chicken is down by almost 37 percent in one month, from May to June, contributing thereby to a reduction in the rate of inflation by 0.5 percentage points. What has led to this precipitate fall? Has the Competition Commission been successful in breaking the cartel of poultry producers? This will be the first major example of success in market regulation. However, egg prices continue to rise on a month-to-month basis.

The government has been highlighting the growing impact of ‘imported inflation’ on the economy, especially in some food prices. One example is vegetable ghee, the primary input for which is imported palm oil. Over the last one year, the price of imported palm oil has gone up by as much as 60 percent. However, the price of vegetable ghee has risen by 24 percent. Similarly, the prices of imported pulses have jumped up by over 15 percent. However, the average domestic price of different pulses is down by 7 percent.

Therefore, there has been success in cushioning domestic consumers from sharply higher international prices. This has been achieved particularly in prices of petroleum products which have increased only marginally in the face of over doubling of the international price of oil. This has been achieved by bringing down the petroleum levy from a peak of Rs 30 per litre to near zero. But for how long can this process continue.

The PBS has recently developed a Decision Support System on Inflation. The objective is to show the deviation from the ‘DC’ prices for price control and the actual prices in different cities. There is a clear pattern in the average extent of deviation. It rises with city size from a low of 6 percent in Sukkur to a high of as much as 36 percent in Lahore to 90 percent in Karachi. Clearly, efforts at regulation of prices of basic commodities will need to focus on large cities.

The PBS has also estimated the margin of the retail price over the wholesale price for various items in different cities. The national average is extremely low in the case of wheat at 2 percent to between 27 percent and 37 percent in vegetables. There is need also for determining the margin from the ex-farm or ex-factory price to the wholesale price. The government claims that this is too large and needs to be drastically reduced, especially in the case of agricultural items.

Another important finding is that Pakistan has a higher rate of inflation than many South and East Asian countries. It is 6.3 percent in India, 5.3 percent in Bangladesh and 5.2 percent in Sri Lanka. Among East Asian countries it is only 1.3 percent in Indonesia, 2.4 percent in Thailand and 4.5 percent in Philippines. There is need to study the reasons for higher inflation in Pakistan.

What is the outlook for inflation in 2021-22? The Annual Plan has set a target of 8 percent. This will require that the rate of inflation continues to fall from its present rate. The petroleum levy is expected to raise Rs 610 billion in 2021-22, which will require taking back the rate to almost Rs 30 per litre. This will raise petroleum prices by 20 to 25 percent and have an across-the-board impact on the price level.

It has also been demonstrated above that wholesale prices are rising at a much faster rate than retail prices. But there is the likelihood of the latter catching up with a lag. There is also the expectation of a rise in energy prices. Already, NEPRA has announced that there will be a hike in the electricity tariff of Rs 2.97 per kilowatt hour. This will include a fresh surcharge of Rs 1.25 per unit and a quarterly adjustment of Rs 1.72 per unit.

Overall, there is a strong likelihood that the rate of inflation in the CPI will start rising once again. The people will be back to making ends meet with even greater difficulties. The government will need to take strong administrative and policy measures if the rate of inflation is to be restricted to a single-digit rate in 2021-22.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021