The pace of inflation seems to have picked up in the very first month of the new fiscal year. According to the data released by the Pakistan Bureau of Statistics on 1st August, the Consumer Price Index (CPI) rose by as much as 8.3 percent on year-on-year basis in July, 2013 compared to 5.9 percent in the previous month and 9.6 percent in July, 2012. On month-on-month basis, it increased by 2.0 percent in July, 2013 as compared to 0.7 percent in June and a decrease of 0.2 percent in the corresponding month last year. Core inflation as measured by non-food, non-energy (NFNE) CPI on MoM basis also went up by 1.5 percent in July, 2013 as compared to 0.4 percent a month earlier and 1.0 percent in July, 2012, indicating that the rise in prices was not transitory. The rise in CPI during July, 2013 was driven mainly by sharp increases in the sub-indices of "food and non-alcoholic beverages" (+ 8.94 percent), "alcoholic beverages and tobacco" (+ 14.84 percent), "clothing and footwear" (+ 14.94 percent), and "housing, water, electricity, gas and fuels" (+ 6.50 percent). Although sub-indices of "health", "transport", "communications", "education" etc also recorded substantial increases but the impact of each of these sub-indices was less than half a percent on the CPI. The Wholesale Price Index (WPI) and the Sensitive Price Index (SPI) also witnessed substantial increases of 1.65 percent and 2.27 percent respectively during the month of July, 2013.
The sudden rise in CPI inflation from under 6 percent during the previous three months to 8.3 percent in July, 2013 is certainly a matter of great concern for policymakers, especially at a time when employment prospects are not improving and there are no chances for commensurate increase in incomes for ordinary people. Since almost 45 percent of the increase in CPI was attributable to food items, the difficulties of the poor who spend most of their incomes on food are not difficult to visualise. Such a high rate of inflation could also have a negative impact on the saving rate of economy which is already at an abysmally low level, resulting in lower investment and poor prospects for economic growth in the coming years. If the rate of inflation continues to be higher than the rest of the world, Pak rupee could depreciate further and accentuate inflationary pressures in economy. In its last monetary policy statement, the SBP had announced a cut in the policy rate by 50 basis points. The decision was apparently taken in the wake of falling inflation which had declined to between 5 and 6 percent. With increase in inflation during July, 2013, the State Bank may have to revise the policy rate upwards again which would disappoint traders, businesspeople and industrialists besides increasing the cost of budgetary borrowings for the government.
Another frustrating aspect is that the rate of inflation is not likely to recede in the coming months. Demand pressures are still entrenched due to highly expansionary fiscal policies of the previous government that had necessitated excessive borrowings by the government for budgetary support from the banking system while availabilities in the economy as measured by the GDP growth rate are still stagnant due to a host of factors including a woefully low level of investment. Increase in sales tax, rise in domestic prices of oil and significant upward adjustment in electricity tariff during the current year would also intensify inflationary pressures in economy. There is definitely a risk that average inflation for FY14 could exceed the announced target of 8 percent by a significant margin. The present government is, of course, trying to subdue inflationary pressures by taking measures such as reduction in budget deficit to sustainable levels, promoting of foreign investment, removal of energy shortages and a visible improvement in law and order situation but such positive measures would take considerable time to show their impact on the price level and help stabilise economy. In the meantime, ordinary people may have to live with the erosion of purchasing power of their incomes and be prepared for lower standards of living.
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