It is of course a matter of satisfaction that although the rate of inflation is inching up a little it is still within tolerable limits. According to the latest data released by the Pakistan Bureau of Statistics (PBS), year-on-year inflation in January, 2017, remained at 3.7 percent, which was unchanged from the previous month's level. Average annual inflation during the first seven months of the current fiscal (July-January, 2017) stood at 3.85 percent as compared to 2.26 percent in the same period of last year. Food group, whose weight in the CPI basket is 37 percent, rose by 2.6 percent on a yearly basis in January, 2017. On a month-on-month basis, food inflation, nonetheless, dropped by 1.17 percent in January due to a decline of 8.51 percent in the prices of perishable food items. Food items whose prices increased included tomatoes, potatoes, fresh vegetables; pulses such as mash, moong and masoor; eggs, chicken; and besan. Among non-food groups, prices of drugs and medicines soared by 13.02 percent, house rent by 2 percent, motor fuel by 1.19 percent and woollen ready-made garments by 1.07 percent. The indices of alcoholic beverages and tobacco, education and health also rose by 12.11 percent, 11.49 percent and 14.88 percent, respectively. Core inflation, measured by excluding the volatile food and energy prices, was registered at 5.4 percent in January, up 1.1 percent from the preceding month.
Looking at the current trends, it is obvious that though the level of inflation as measured by the CPI during FY17 may be higher than 2.81 percent recorded during 2015-16 it is clearly going to be lower than 6 percent targeted at the beginning of the current year. The fact that food group was the main factor responsible for containing the price pressures is another plus point because the poor and average households who are already battered by high rate of unemployment and poverty will be less affected as major part of their budgets are spent on food items. However, while the containment of inflation is a welcome development, it seems to be the result of transitory factors. Pak rupee may have to be depreciated as the local currency is overvalued and recent rise in oil prices in the international market has to be passed on to domestic consumers. If the government continues to insist on maintaining the present parity of the rupee and the prices of oil are not increased in the domestic market for the sake of price stability, the implications of this policy for both balance of payments and fiscal policy could be serious. In our view, the government, instead of relying on such manipulations, should use proper tools with a view to achieving this objective. For instance, monetary stability on a long-term basis could only be sustained by improving the fiscal position of the government, borrowing less from the banking system to fill the fiscal gap, narrowing the current account deficit to the minimum and enhancing the productivity of economy. A host of policies would be involved in this process but this would not be possible without taking appropriate and timely measures which may be unpopular. Control on inflation would also constrain the SBP to continue with the existing easy monetary policy which would help the economy grow and further ease the price pressures.
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