Core or headline? Urban or national? As inflation hit multiyear high last month, questions concerning inflation benchmarks used for determination of monetary policy have resurfaced. Answers? Not so much.
State Bank pf Pakistan (SBP) has made it clear that headline inflation is the one used for inflation targeting and monetary policy. SBP Governor is on record saying that “headline inflation is used by 95 percent of the central banks.”
It appears the core vs headline debate is settled for now. Although it may be of interest to note that the policy rate in India seem more aligned with core than the headline number, at least as of now. Either that, or India has decided to run negative real interest rates – as the interest rates are running lower than headline target inflation rate. But then India could very well be the remainder 5 percent of the world.
On to the urban vs national question. National CPI is a new phenomenon, as rural was made part of CPI calculation only in September 2019. For the first few months, rural and urban inflation moved in tandem, and raised no eyebrows. The January CPI number for rural inflation shot up to 16.3 percent, leading to multiyear high headline CPI.
This raises questions over the efficacy of monetary policy transmission mechanism with respect to rural inflation? Former SBP Governor, Shamshad Akhtar, in a recently published interview in Business Recorder, said that “when interest rates are high, KIBOR on agriculture loans also increases correspondingly,” also implying that the informal lenders will adjust the rates upwards in tandem with tightening.
The jury is out whether the informal lending does indeed go hand in hand with movements in policy rate – even as they are noted to charge exorbitant rates, far divorced form rates charged by lenders in the formal market. Having said that, there is a reason why informal lending is named as such, which makes it hard to place one’s finger on a number and pick a side either way. If some effort is put in finding answers to the monetary policy transmission mechanism in rural areas, researchers and policymakers would be doing the economy a great service.
But if assumptions may be made for argument’s sake, assume that headline national inflation is the best bet to benchmark inflation targeting and base monetary policy on. Which leads to a bigger and possibly more important question. Does the rural CPI inflation move in tandem with urban? Does the largely farm based rural population reach out to retail stores to buy wheat and other staple for their consumption? If the CPI data tabulated by the PBS is any guide, the answer to these questions is yes.
But then, the CPI data for the longest time had no regard for slabs in energy pricing. It is a long-held belief that a large portion of farmers’ food basket constitutes of self-grown crops. A United States 2017, Department of Agriculture (USDA) report titled, “Pakistan” Grain and Feed Annual” says “farmers in Pakistan retain about 60 percent of their wheat production for seed, village and household food consumption.” This gives a good hiding to rural CPI’s wheat prices in rural retail markets. While, a lot of times, PBS reported prices are criticized for being lower than actual – the case may altogether be different when it comes to rural food prices, given the footprint of production for subsistence purposes.
And that is where the PBS should act. It is hard to claim that PBS lacks data to ascertain the same. The questionnaire for HIES 2015-16 conducted by none other than the PBS, asked the specific questions on food produced, unpaid for and consumed. It is for the metadata economists and chartists to dig the numbers out. But a cursory look at PBS rural CPI numbers clearly indicates that this has not been taken into consideration while calculating food price changes for rural areas.
It is time the ‘economists’ circle of the country rises beyond the broad contours and all-macro mentality, and ask questions which may sound pedantic, but have consequences far beyond the micro. For the PBS, the question seems a year too late. It was not fond of altering the calculation methodology mid-way. It appears, one will have to live with the notion that the rural population consumers nothing that it produces and buys everything from retailers, till at least the next CPI base change. And that could be 6-7 years from now.