Rise in inflation

It is sad to note the rate of inflation in Pakistan continues to be at a high level and its prospects in the ongoing year are also disturbing. According to the latest data released by the Pakistan Bureau of Statistics (PBS), average rate of inflation during July-June, 2018-19 in the country was as high as 7.37 percent compared to 3.92 percent in the previous year and 4.16 percent a year earlier. The CPI on a YoY basis also soared by 8.89 percent in June, 2019 over June, 2018 as compared to 5.21 percent a year earlier and 3.93 percent in June, 2017 over June, 2016. A similar trend was witnessed in YoY Sensitive Price Index (SPI) and Wholesale Price Index (WPI) which denoted hefty increases of 10.65 percent and 12.69 percent as compared to the rise of 1.92 percent and 7.64 percent, respectively, in the previous year. The main group of commodities and services contributing to the rise in CPI in June, 2019 over the corresponding month of last year comprised food and non-alcoholic beverages (+7.52 percent), alcoholic beverages and tobacco (+22.09 percent), housing, water, electricity, gas and fuels (+9.99 percent), furnishing and household equipment (+9.26 percent), health (+8.26 percent), transport (+14.96 percent) and communication (+8.82 percent). It may be mentioned that no decline in prices was seen in any group of commodities and services during the year.
It is more than obvious that the latest data on CPI and other price indicators is highly disturbing for a number of reasons. There is no doubt that continuous erosion of purchasing power of the rupee by such a high magnitude of inflation is quite unjust for the poor and ordinary people of the country. One could, of course, easily visualize the growing deprivations and miseries of ordinary people who spend most of their incomes on food and face dwindling prospects of employment due to lower growth rate of the economy. A higher rate of inflation could also depress the rate of saving and investment in the country and have negative consequences for the prospects of economy. Since the rate of inflation is much higher in Pakistan compared to its trading partners and competitors, the authorities of the country would be obliged to depreciate the local currency further in order to maintain competitiveness in the international market. Besides, monetary policy has to be tightened further to contain the rate of inflation and support the balance of payments position of the country. Any increases in the policy rate subsequent to uptick in inflation would also result in higher lending rates, curtailment in private sector credit, slower growth rate and higher debt servicing by the government, putting more pressure on the fiscal position of the country which is already very poor.
More disturbing is the fact that the outlook for inflation during FY20 is also distressing and the CPI is all set to increase by 13 percent or so on an average basis compared to 7.34 percent in 2018-19 and around 4.0 percent in the two years prior to FY19. This estimate is based on a sound analysis of the economy as fiscal deficit of the country is likely to be over 7.0 percent during the current year and the growth rate of the economy, which could partly neutralize the impact of this highly expansionary fiscal policy, is projected to dampen to as low as nearly 2.0 percent due to stabilisation policies as envisaged under the EFF programme approved by the IMF a few days ago. Monetary policy is likely to be tightened further to control inflationary pressures in the economy but it is more effective if the fiscal policy of the country is also supportive (contractionary). Overall, however, the present rate of inflation and its prospects do not appear to be satisfactory or promising and the government needs to keep a very close watch on the emerging situation and be ready to take appropriate measures in time so that the inflationary pressures in the economy could be contained within reasonable limits and the vulnerable sections of society are not unduly burdened. Needless to say that the temptation to control prices through administrative measures should be avoided at all costs because such an action generally proves more harmful than the benefit intended to be derived from such an operation.