Commodities routinely subjected to price control are also worst hit by inflationary spiral in the long-term. That is the lesson for movers and shakers within the ruling party, repeatedly found extolling the benefits of price control over consumer essentials.
Pakistanis saw one of the slowest increases in prices of essential commodities during the last PML-N regime. In fact, between June 2013 to May 2018, increase in average daily wage outpaced growth in prices of almost every essential commodity.
By the end of PML-N’s tenure, daily wage had increased by 1.77 times (or an 8 percent 5-year CAGR). Meanwhile, prices of kitchen essentials such as flour and sugar had remained virtually static. Going by any metric, PML-N government managed to increase the purchasing power of daily wage earners, especially when calculated in terms of prices of essential kitchen items.
But the last government wasn’t only relying on an overvalued currency to suppress inflationary pressures. Retail prices of various kitchen essentials – where the value chain largely consists of domestically produced raw materials and inputs – followed very divergent trends during its 5-year in power. Consider that between Jun 2013 – May 2018, average prices of flour and sugar recorded a negative 5-year CAGR, while prices of fresh milk or gram (dal chana) increased by 4.7 and 6.3 percent, respectively.
What was the key difference? In few words, control over raw material prices. Although the last regime also tried its level best to control retail prices using the hammer of district administration, it only met with success in case of commodities where raw material prices were also fixed by the government. Namely, wheat and sugarcane.
But just as Pakistanis discovered in the case of overvalued rupee, the longer prices are controlled, the more vicious revenge they exact. Since PTI came into power, flour and sugar retail prices have increased by 32 and 76 percent, respectively. Meanwhile, daily wages have only increased by 21 percent, indicating a conspicuous loss in consumer purchasing power, especially in terms of prices of kitchen essentials.
Meanwhile during its first 32 months in power, PTI government has also tried everything to tame the inflationary pressures, only for retail prices to mount a more vicious counterattack each time. The price increases have been particularly painful for flour and sugar, as the incumbents allowed one-off increases in raw material rates that had long been held static under the last government.
After witnessing a remarkable failure of its administrative price control measures, it appears that the PTI government will now attempt to prop up consumer purchasing power by allowing wage increase. This may also become politically inevitable as the ruling party prepares to enter consumer led economic growth mode before the next general elections, only 26 months away. But has the party learned any lessons from the predecessor it loves to censure?
If PTI is true to its promise of sustainable economic growth and reform, it must ensure that the gain in consumer purchasing power after next round of wage increases are not fleeting. An increase in nominal income will inevitably fuel consumer demand, putting pressure on retail prices for various commodities – including kitchen essentials – by varying degrees.
When that happens, PTI government must avoid the temptation of imposing ceilings on prices of kitchen essentials, only to keep the consumer-led exuberance going. Sooner or later, all prices adjust in response to supply-demand pressures; but the outcome is worst for commodities where price changes are suppressed for longest.