Food inflation rises to 22pc!

The Sensitive Price Index (SPI) for the first full week of 2020 ending on the 9th of January has been released by the Pakistan Bureau of Statistics (PBS). Credit must be given to the PBS for, more or less, immediate release on a weekly basis of information on prevailing prices of basic items in different cities.

The SPI has been updated and the base year now is of 2015-1. 51 items are included in the index and are generally basic consumer items, especially of food, which figure regularly in purchases by households. 33 items are food consumption items including cereals, vegetables, livestock products, pulses, sugar, vegetable ghee, etc. Therefore, the SPI comprehensively covers food prices. Almost two-thirds of the weights in SPI are of food items. The coverage of food items is, more or less, the same as the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

The SPI on a year-to-year basis has risen during the first week of January 2020 by 20 percent. Disaggregation of the SPI into the food and non-food components reveals that food prices collectively have gone up by over 22 percent and non- food prices by 16 percent. As compared to this the CPI of food, beverages and tobacco went up by 18 percent in the month of December 2019 and the WPI by 11 percent of these items.

Two conclusions can be drawn from this comparison. First, the rate of inflation in food prices is understated by the CPI. Second, the WPI has risen at a much slower rate in the case of food prices than either the SPI or the CPI. This implies that the inflation in consumer prices of food items is due generally more to price escalation by retailers rather than by wholesalers and middlemen in the food supply chain.

There has recently also been an upsurge in the SPI. From the last week of November to the third week of December 2019, the index fell on a week-to-week basis. Thereafter, over the last fortnight it has been increasing weekly at the rate of0.6 percent. This may, of course, be partly due to disturbance in the movement of goods caused by the transporter's strikes.

The biggest contribution to food inflation has been by the explosion in vegetable prices. The prices of tomatoes, onions and potatoes have gone up by 234 percent, 123 percent and 100 percent respectively. Consequently, almost 43 percent of the rise overall in food prices is due to vegetables. This is in sharp contrast to their weight in the food price sub-index of SPI of 8 percent.

The rate of inflation in prices of cereals ranges from 8 percent in the case of Basmati rice to almost 20 percent in wheat flour. Livestock products, especially milk, have the combined weight of over 44 percent in the food price index. However, they have witnessed less inflation and their overall contribution to rise in food prices is 21 percent. Other food items which have shown high rates of inflation are sugar at 27 percent, vegetable ghee at 23 percent and cigarettes at 36 percent.

The current 22 percent increase in the price index of basic food items is the highest since 2008-09, when it reached 23 percent. However, the pattern of inflation in 2008-09 was very different. Almost 60 percent of the contribution to the rate of inflation was by cereals, livestock products and sugar combined. Interestingly, the price of tomatoes went by only 4 percent in 2008-09 as compared to 234 percent currently.

There is need to understand the impact of rapidly rising food prices on the household budget of a relatively low-income family in the country. According to the PBS, the rate of inflation in the overall SPI rises to a peak of above 22 percent in the case of a typical middle-income family with income per month ranging from Rs 22,889 to 29,517. At the two ends of the distribution, the rate of increase in the SPI is 19 percent. Therefore, there is not much difference in the rate of inflation in basic consumer items among the various income groups.

According to the latest Household Integrated Economic Survey (HIES) of 2015-16 by the PBS, the share of food expenditure in the monthly income of the lowest quintiles of the country is almost half. Therefore, if food consumption is to remain unchanged, in quantity terms, then the share of food expenditure in income will rise to 60 percent. Given the absence of savings in the case of such households this implies one of two possible outcomes. Either the level of food consumption of basic items has to be reduced by 20 percent or the expenditure on other goods and services will have to be cut by 25 percent. These options are both painful for a low-income family. In the event food intake is reduced then the incidence of poverty rises in the country as a larger proportion of the population becomes malnourished, thereby falling below the Cost of Basic Needs (CBN) poverty line.

The fundamental question is what factors explain the spiral in food prices especially after May 2019? It is interesting that the peak rate of food inflation earlier in 2008-09 can be attributed partly to the policy of the PPP Government to drastically raise administered prices. The procurement price of wheat was jacked up by an unprecedented 52 percent and that of sugarcane by 42 percent. But this is not the case in 2019-20. Both prices have remained unchanged at previous year's levels.

Therefore, the explanations for food price inflation have to be found elsewhere. The first possibility is of supply shortages. In fact, many food prices are subject to the 'cob-web' cyclical effect. This is especially the case with vegetables and fruits. In the latter part of 2018, the prices of vegetables fell sharply, by 60 percent in the case of tomatoes, by 51 percent of onions and by 34 percent of potatoes. Therefore, there has been big shift away from production of vegetables this year, leading thereby to a big jump in prices. Hopefully, if the 'cob-web' continues, the supply response will be large and prices of vegetables could fall sharply in the latter half of 2020.

Other supply factors include the negative impact of the big increase in fertilizer prices and in prices of other inputs. This has exerted a cost-push effect on food prices. The price of urea has gone up by 13 percent and of other fertilizer products by up to 10 percent. Similarly, the agricultural power tariff has gone up. In addition, there has been a ban on imports, including vegetables from India. Also, more recently, there have been some supply interruptions due to transport strikes.

The next question is the impact of the big rupee devaluation since June 2018 on prices of imported food items. The analysis of the relationship between imported and domestic food prices leads to a somewhat unexpected conclusion. The major imported food items are palm oil, pulses and tea. These items have witnessed a rise in the rupee price of import of only 6 percent, 7 percent and 6 percent respectively. The domestic price of vegetable ghee has gone up much more by 22 percent, pulses by 52 percent and tea by 10 percent. Therefore, the factors contributing to inflation in food prices are more domestic in nature, like additional taxation on some consumer items in the Budget of 2019-20.

The fact that inflation has been faster in retail prices than in wholesale prices has been highlighted earlier. There appears to have been a collective response by retailers to protect their real incomes in the face of rising cost of living by increasing artificially the prices of products marketed by them. This is sometimes referred to as the 'real income struggle'. It is absolutely necessary in such situations that local price controls at the market level are effectively put in place. Unfortunately, this has not happened up to now and represents a big failure of governance. Further, the formation of cartels and resort to restrictive trade practices has been left largely unregulated by the Competition Commission of Pakistan (CCP).

The recent decision to provide bigger discounts on basic food products by the Utility Stores Corporation (USC) is a welcome step. However, it will have to be greatly upscaled by establishing many more outlets, especially in lower income neighborhoods, and substantially expanding supplies. Unfortunately, there is only a small provision for a subsidy to the USC in the current Federal Budget of Rs 5.5 billion. A special provision will have to be made now of up to Rs 30 billion, out of the budgetary allocation currently for Social Protection. Effective local price control mechanisms must be immediately put in place and CCP function in a much more aggressive manner.

The people of Pakistan are paying a high price for galloping inflation and rising unemployment. The highest standard of economic management and governance is necessary if any form of disruption is to be avoided.

(The writer is Professor Emeritus at BNU and former Federal Minister)