Inflation has come down dramatically – from 28.3 percent in January 2024 to 1.5 percent in February 2025. The question remains: why isn’t there a feel-good factor?
Inflation, economists maintain, is the result of an increase in the money supply relative to the supply of goods. If the economy is not running at capacity, read unused factors of production (labour, credit, raw materials), inflation may jumpstart the wheels of industry and the increased output would, in turn, spur consumption (aggregate demand) and thereby propel the economy towards growth.
If however prices are falling, consumers may stave off purchases on the assumption that prices would come down further, which would reduce aggregate demand translating into lower output, layoffs and a faltering economy.
This implies a bit of inflation is good for the economy, so argue economists, to fuel output and for this reason the United States Federal Reserve targets a 2 percent inflation rate based on the Personal Consumption Expenditures Price Index defined as capturing inflation/deflation across a wide range of consumer expenses and reflecting changes in consumer behaviour.
Pakistan does not undertake a Personal Consumption Expenditures Price Index though the Pakistan Bureau of Statistics (PBS) does quantify, in the weekly updated Sensitive Price Index (SPI) that covers only 17 urban centres and takes note of 51 essential items, the impact on five-income groups – 1 – income up to 17,732 rupees; 2 – income from 17,733 to 22,888 rupees; 3 – income from 22,889 to 29,517 rupees; 4 – income from 29,518 to 44,175 rupees; and 5 – above 44,175 rupees.
Three observations are critical. First, rural areas are ignored in SPI calculation and given that the bulk of our population still lives in rural areas this omission is puzzling. According to the first-ever digital Population and Housing Census 2023 uploaded on the PBS website, rural population was 61 percent of the total.
In addition, there is a need to revisit the 51 essential items for the lower two income groups as say cooking oil, lawn (fabric) and petrol Super are some of the items that are beyond the income range of the lower two income groups; and bafflingly rent is not included, which is one of the major expenditure items in urban centres.
Second, given the 44 percent poverty levels in the country today and unemployment rates as high as 22 percent as per the 2023 Population and Housing Survey, the lowest monthly income of 17,732 rupees in the PBS data is puzzling for two reasons: (i) given the minimum wage is a high of 37,000 rupees per month questions arise about the selection of the lowest three income groups by PBS. And perhaps there is a need to project and/or document the number and income of those working in the informal sector, and their income on average.
And finally, the quarterly payment under Kifalat (cash disbursement) under the Benazir Income Support Programme (BISP) is 13,500 rupees (monthly 4500 rupees) for a family size of 5 to 7.
While acknowledging that BISP presupposes that the disbursement is in addition to other household income, yet it is suggested that the BISP Secretariat begins to assess the essentials that can be bought with money disbursed under BISP which would provide an alternate and perhaps better estimate of the erosion of the rupee for the poor especially as today poverty levels are a high of 44 percent as estimated by independent economists, 40.5 percent (3.65 dollars per day in 2017 purchasing power parity or around 30,550 rupees per month at today’s rupee dollar parity) as calculated by the World Bank for lower middle income poverty with 13 million falling below the poverty line in 2024 – or in income group 3 which, as per the PBS, registered a positive 0.37 percent inflation for the week ending 27 February 2025.
The situation is much worse if one considers the Multidimensional Poverty Index (MPI), developed by Oxford Poverty and Human Development Initiative (OPHI) and United Nations Development Programme’s (UNDP’s) Human Development Report Office, which is a relatively recent measure to compute acute poverty.
The MPI complements consumption based poverty measures by reflecting deprivations that individuals face in other dimensions such as education, health, and standard of living. MPI is the product of two components: a) Incidence of poverty (H) or the percentage of people identified as multi-dimensionally poor, or the poverty headcount; and b) Intensity of poverty (A) which defines the average percentage of dimensions in which poor people are deprived.
UNDP notes further that: “the most recent survey data that were publicly available for Pakistan’s MPI estimation refer to 2017/2018. Based on these estimates, 38.3 percent of the population in Pakistan (88,701 thousand people in 2021) is multi- dimensionally poor while an additional 12.9 percent is classified as vulnerable to multidimensional poverty (29,896 thousand people in 2021).
The intensity of deprivations in Pakistan, which is the average deprivation score among people living in multidimensional poverty, is 51.7 percent.
The MPI value, which is the share of the population that is multi-dimensionally poor adjusted by the intensity of the deprivations, is 0.198. In comparison, Bangladesh and India have MPI values of 0.104 and 0.069, respectively.“
Apart from the reported practice of understating inflation, a trend that many administrations have endorsed, knowingly or not, there is no doubt that the general public is faring badly under the stated negligible inflation, a source of much hand clapping each other on the back by the country’s cabinet members, because MPI is on the rise.
To further exacerbate the situation, the country continues to operate within the framework of a fragile economy, with large scale manufacturing sector yet to go into the positive realm, while implementing severe fiscal and monetary contractionary policies under the auspices of the International Monetary Fund programme that is throttling growth.
For the country’s economic leaders to better assess the impact of the decline in inflation it may be more appropriate to task the Ministry of Planning, Development and Special Initiatives to update the survey data for the calculation of MPI as it may be recalled that it was Ahsan Iqbal, who held the portfolio of this Ministry at that time as well, who launched the MPI in 2016.
Copyright Business Recorder, 2025
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