Spurt in inflation

The Pakistan Bureau of Statistics (PBS) has released the estimate of the rate of inflation in the national Consumer Price Index in September 2023. There is a visible spurt. It has gone up by 4 percentage points on a year-to-year basis from 27.4% in August to 31.4% in September. The declining trend in the rate of inflation from June 23 to August 23 has perhaps unexpectedly been reversed.

The average rate of inflation is now 29% in the first quarter of 2023-24. The annual rate of inflation projected for the year at 21% by the government is beginning to look unrealistic.

The average rate of inflation over the next three quarters will have to fall to 18.3% for the annual average to be 21%.

This is highly unlikely. However, the IMF projection of the rate of inflation by the IMF of close to 26% may still be feasible if there is some drop in the rate of inflation in the second half of 2023-24.

The rise in the rate of inflation in September 2023 is accompanied by a fundamental change in the pattern of inflation. The year-to-year rate of inflation in the food price index has actually declined from almost 40% in August to less than 35% in September. The overall increase in the rate of inflation is due to a massive jump in the rate of increase in the non-food price index from under 20% in August to over 30% in September.

The Sensitive Price Index in recent weeks was already signaling the hike in the rate of inflation. During the second week of September, it was 26.3%. It jumped up sharply in the third week to 38.7% and in the fourth week it was 37.3%.

Therefore, an upsurge in the overall CPI in September could have been anticipated. Another factor contributing to the 4%-point increase in the rate of inflation in September 2023 is a low-base effect. The price index had actually fallen by 1.2% in September 2022.

Which are the items which are showing extraordinarily high inflation in prices currently? Within the food and beverages group, the highest rate of inflation on a year-to-year basis is observed in wheat flour, rice, and sugar of as much as 85%, 68% and 92%, respectively. Clearly, the extraordinary increase in the prices of staple diet cereals is bound to disproportionately impact on the lower income groups.

The international price has gone up of rice due to the decision of India to stop the export of rice. The export price of rice of Pakistan is consequently also increasing, with the inevitable impact on the domestic prices.

Hopefully, with a good wheat crop this year the atta price will stabilize. Also, efforts are being made to curb the smuggling of sugar. This should also help in stabilizing the sugar price.

There is need also to highlight the broad-based impact of rising prices of motor fuel and transport services, which have risen on a year-to-year basis by 31% and 21%, respectively, in September. There will continue to be pressure due to the rising price of crude oil and petroleum products internationally. Already, the dollar price of Brent crude per barrel is up by over 20% since end-June. There are projections that it could approach $100 in the next few months. If this happens, then not only will this put pressure on the trade deficit but it will also be a major factor contributing to the continuation of the high rate of inflation in Pakistan.

The upsurge in the non-food price index in September highlighted above needs to be examined. This is primarily due to an unbelievable upsurge in the electricity tariff on consumption up to 50 kwh monthly of 164%.

This alone has contributed to raising the rate of inflation in September by as much as 6%-points, as the reported increase in August was only 8%. It is not surprising that there continue to be large-scale protests against the unprecedented hike in electricity tariffs.

The unfortunate reality is that even the very high observed rate of inflation is actually still understated. The largest weight in the CPI of over 19% in urban areas is of housing rent. Believe it or not, the rate of inflation in housing rent is reported by the PBS at only 5.2%.

This is in sharp contrast to the cost increase in inputs for construction of 26% and in wages of construction workers of 13%. If rents reflect fully the rise in costs of construction, then the estimated increase in housing rent is 22%. If this is the case, then it will raise the rate of inflation in September 2023 from 31.4% to 34.5%.

There is a need to get a perspective on the likely rate of inflation in coming months. The administrative measures are helping, and steps will be needed to eliminate smuggling to the extent possible. If the rupee continues to strengthen, despite falling foreign exchange reserves, then this will also help. However, international prices, especially of oil and some food items, are on the rise. Overall, it seems unlikely that in the coming weeks there will be a visible and big fall in the rate of inflation in Pakistan.

Copyright Business Recorder, 2023