Surging inflation

Inflationary trends in the economy seem to have become entrenched. According to the latest data released by the Federal Bureau of Statistics (FBS), the CPI inflation surged by 14.19 percent in January, 2011, over its corresponding level a year ago, with prices of perishable food items rising by as high as 44.39 percent.
However, the increase in inflation was about 1.30 percent less than last month. The fact that the rise was somewhat less in January, 2011 than in December, 2010 over its corresponding month in the previous year does not mean that prices in the economy were comparatively lower during the month. It was only the rate and the way that the Consumer Price Index (CPI) is calculated that gave such an impression to the people not familiar with the compilation of official data. The base effect, which was the main reason for such an "easy on the eye" development can provide no comfort to the ordinary citizens in the real world from persistent high inflation.
Further analysis revealed that food inflation during January, 2011 increased by 20.42 percent, cost of apparel textile and footwear by 12.37 percent, house rent by 6.5 percent, fuel and lighting by 8.8 percent, household furniture by 10.43 percent, transport and communication by 13 percent, recreation and entertainment by 13.78 percent, education by 5.28 percent, medicare by 16.15 percent and cleaning and laundry by 10.71 percent. Compared to January, 2010, SPI and WPI were also higher by 18.8 percent and 22.60 percent respectively in January, 2011, indicating that inflation was pervasive and all-encompassing.
The latest trend in inflationary pressures, although expected, was of course very discouraging for obvious reasons. In the beginning of FY11, the government was hopeful that it could contain the rate of inflation to a single digit during the year and bring it down further to around 5.0 percent in the subsequent years. But, such a scenario now seems to be impossible. In fact, the State Bank of Pakistan, in its latest monetary policy statement, has again raised its inflation estimates to 15-16 percent for FY11 and does not expect a substantial improvement during FY12. Several factors have combined to keep the inflation at such a high level.
While expansionary fiscal policies (despite the fire-fighting efforts of the SBP at a great productive cost to the economy) have contributed to the excess demand, a very low growth rate (now estimated by the SBP in the range of 2-3 percent) due to a variety of factors are widening the gap between the availabilities in the economy and the cash to grab them, with the result that stability in prices is hard to contemplate. Anyhow, this general statement is so much multidimensional and loaded that it cannot be covered or discussed in some detail in this piece. Only suffice to say that higher inflation is not only highly unfair for the ordinary people, but has also negative repercussions for investment, growth and the external sector. In particular, one could easily visualise the miseries of the lower-middle or poor people who spend most of their incomes on food and the prices of perishable kitchen food items have jumped by about 45 percent in the last twelve months, when the rise in per capita incomes was almost non-existent and the chances for employment were shrinking.
Worries about inflation are reinforced with a realisation that even the future does not hold any hope. While the factors fuelling the present inflation are not likely to go away soon, some added developments make the picture bleaker. Oil and electricity prices are now frozen at a very high cost to the economy for political reasons, and when unfrozen, which is inevitable, would doubly intensify inflationary pressures, making up for the lost time. The mishap was also certainly beyond anybody's imagination and could only be called an accident of history but the Raymond Davis case, if mishandled has the potential to have profound adverse impact on the economy of Pakistan.
If not wisely handled on both sides, it could impact on investment, growth, fiscal and external sector position, the ongoing programme with the IMF, relationship with multilateral agencies, employment, exacerbation of the existing social disharmony and poverty level in the country thereby reinforcing inflationary trends to levels that we fear to mention at this juncture. We cannot say what the ultimate decision would be or should be because of so many imponderables involved but it would be better for the countrymen to brace for some tough times ahead so far as the level of inflation is concerned.