The Pakistan Bureau of Statistics (PBS) has come up with a very pleasant surprise. The year-to-year rate of inflation, as measured by the Consumer Price Index (CPI), has come down to only 11.8% in May 2024. This is close to a single-digit rate, and is the lowest since November 2021.
There is need to analyze the factors that have contributed to this sharp decline. This will enable an assessment as to whether this low rate of inflation will be sustained in coming months.
The fact is that the year-to-year rate of inflation has been falling steadily since December 2023, when it was 29.7%. The rate of decline has averaged over 3.5 percentage points monthly. However, the decline was exceptionally large at 5.5 percentage points in May 2024, as compared to April 2024.
The truly remarkable development is the extraordinary containment in the rate of inflation in food prices. On a year-to-year basis, food prices have increased by only 1.4% in the country as a whole. The rate of inflation in food prices was as high as 29% in December 2023.
The fall in the rate of inflation is much less pronounced in non-food prices, which have a weight of over 60% in the overall CPI. On a year-to-year basis, the rate of inflation in May 2024 was 19.8%. The fall is less pronounced from 28.8% in December 2023.
The first factor which has contributed to the very low rate of inflation in May 2024 is what can be described as a ‘high base’ effect. From December 22 onwards the rate of inflation had been rising. It reached the peak of 38% in May 2023 and has been declining since then.
Therefore, the rate of inflation in May 2024 is reduced by the ‘high base effect’ of the peak rate of inflation in May 2023. This also increases the likelihood that with the fall in the rate of inflation sharply after May 2023, the base effect will be less pronounced and we could see some upsurge in the rate of inflation from June 2024 onwards.
Turning to the extraordinary decline in May 2024 in the rate of inflation in food prices, there is a need to determine at the individual commodity level which items have contributed to this very positive development. This will put less incremental pressure, especially on the lower income households in the country.
The first item which has seen a big decline in price in May 2024 in relation to the price in May 2023 is wheat flour of 28.5%. However, the reason for this is that farmers have been compelled to dump their surplus in the presence of a bumper crop and an extra-ordinarily high level of wheat imports for reasons which have not been clarified.
The implication is that farmers will have less liquidity for the forthcoming Kharif season. This will affect output of major crops like rice, cotton and sugarcane. Consequently, this could contribute to an upsurge in agricultural prices later this year.
The other food items with relatively large weights in the CPI are livestock products. The price of fresh milk is up by only 9.2%, while the price of chicken has actually fallen by as much as 22.3% and that of eggs by 8.5%.
It is not clear why livestock prices have fallen or shown only small increases. One likely explanation is that the lack of increase in real incomes of majority of the population has contributed to a fall in demand for products with high income elasticity, like livestock items, thereby limiting the price increases.
Turning to prices of imported food items, there is a fall in the prices of two major items on a year-to-year basis. The prices of vegetable ghee, with imported input of palm oil, and of tea have both fallen, by 16.5% and 1.4% respectively. This is a reflection of a downward trend in international commodity prices and stability in the value of the rupee in 2023-24.
There is a need also to look at non-food prices, especially at the trend in utility tariffs. As expected, electricity charges have gone up sharply by almost 59% and gas charges by a huge 319%. Combined, rise in these two charges accounts for 51% of the overall increase in the CPI in May 2024 on a year-to-year basis.
What is the outlook for the rate of inflation in 2024-25? The Staff Report of the IMF of the 10th of May, 2024, has projected the rate of inflation in the CPI at a moderate 12.7%. The Ministry of Finance is apparently working with a slightly higher rate in its budgetary projections.
The outlook for inflation in 2024-25 will hinge on a number of factors. First, it has been highlighted that the rate of escalation in utility tariffs is a major contributory factor. Pakistan’s signing a three-year Extended Fund Facility will necessitate focus on the limitation of the size of circular debt in the energy sector. This will require periodic upward adjustments in tariff, starting from July.
Second, the 2024-25 budget is likely to contain a target for a quantum jump in FBR revenues of even above 35%. This may require enhancement in sales tax rate overall from 18% to 19% and withdrawal of exemptions or lower rates on a number of essential items. These measures will contribute further to inflation.
Third, a positive factor is likely to be the stability or fall in international commodity prices in the face of a slowdown in the growth of the global economy. Already, the oil price has fallen significantly.
However, in the presence of the IMF Programme, there will be pressure for reversion to a market determined exchange rate policy. The IMF has projected a depreciation in the value of the rupee of 18% in 2024-25.
Overall, a projection of the rate of inflation of 12.5% to 13.5% in 2024-25 appears to be on the low side. A perhaps more likely rate of inflation is 17% to 19%. This will, of course, depend on the state of both the domestic and the global economy next year.
Copyright Business Recorder, 2024
The writer is Professor Emeritus at BNU and former Federal Minister
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