March, 15 2005	Tuesday	4 Safar 1426

KARACHI, March 14: Inflation rose by 9.95 per cent in February 2005 over February 2004, data released by the Federal Bureau of Statistics show. This is the highest increase in inflation since September 1997.

This high rate of inflation in the eighth month of the current fiscal year indicates that full year inflation would end up somewhere between nine and ten per cent, far higher than even the revised target of 7 per cent. The initial target for inflation during this fiscal year was five per cent as the economy was expected to grow by 6.6 per cent. But as the economic growth is now set to touch 7 per cent, the National Credit Consultative Council, the body that approves monetary plan, has revised the inflation target to 7 per cent.

Since the beginning of this fiscal year, year-on-year inflation has remained at nine or more than nine per cent in eight out of five months and has never fallen below 7 per cent. FBS data show that year-on-year inflation shot up to 9.95 per cent in February from 8.51 per cent in January as food and beverage group of 374-item consumer price index rose by 12.91 per cent and 12.34 per cent increase in house rents during this period.

As inflation now seems set to reach at least nine per cent during this fiscal year, both fiscal and monetary authorities are to be blamed for this. The government is responsible for fuelling inflation not only through periodical increases in petroleum prices but also by acting too slow against hoarders of food items, speculators and profiteers. The State Bank is equally responsible for allowing inflation to rise so sharply because it continued with a lax monetary policy for too long and started tightening it too late and too slowly. Lately, however, the central bank has been increasing interest rates rather aggressively but that would help in containing inflation after a lag of time.

A 9.95 per cent inflation last month means that real purchasing power of Rs1000 in February 2004 fell to Rs900.5 in February 2005. Or, what could have been purchased for Rs1000 in February 2004 was selling at Rs1099.5 in February 2005. Obviously, people have not got a wage increase during last one year at the rate of Rs99.5 per Rs1000. They have rather had to cut down their expenses by Rs99.5 per Rs1000.

There are indications that the government would now change the formula for fixing local prices of petroleum products so as to avoid an increase in them. The State Bank is also set to increase interest rates much faster than in the past. The twin moves should help contain inflation in future, if factors contributing to inflationary expectations do not offset them.

How rising inflation has turned saving rates negative, paving the way for speculation in real estate and stock prices is evident from the fact that 9.95 per cent increase in inflation in February is higher than even the rate of return on 10-year Defence Saving Certificates, which is 8.5 per cent.

On the other hand, lending rates of banks are still too low, making it possible for businesses to use part of the borrowed money to build up inventories and speculate in real estate and stock market.

Fresh average lending rate of all the banks combined stood at 6.68 per cent in January 2005 against year-on-year inflation of 8.51 per cent. Data on average lending rate in February is yet to pour in but that would definitely be much lower than the inflation rate of 9.95 per cent.

Just how people have gone about making quick bucks through speculative activities taking advantage of this real negative lending rate can be gauged from the fact that a Karachi-based exporter has hired a retired colonel for Rs60,000 per month to buy and sell properties in Defence and Clifton on his behalf.

Prices of real estate and housing units have more than doubled in some parts of Defence and Clifton during last two-three years.