July 03, 2006	Monday	Jumadi-ul-Sani 6, 1427

THE ever-intensifying inflationary pressure is the today’s burning topic. People in the street are frequently spotted discussing the astronomical rise in sugar prices and the ludicrously high property/estate rates dominate drawing room discourses. On the other hand, ‘official’ economists are usually found busy employing statistical jargon to prove that prices are indeed ‘on the average’ quite stable. Where does the truth lie?

Is the purchasing power of the fixed income group being steadily eroded? Are the poor and the middle class consistently losing out on the much-trumpeted high growth of the economy? Is there too much being made out of the price increase in a handful of basic necessities? Or is it the methodology of inflation measurement which is distorting the true picture by sending false price signals?

It is not exactly easy to attain satisfactory answers to these tangled queries. However, the least one can do is to make an earnest effort to look into the facts and figures underlying the claim of a moderate and steadily subsiding inflationary level.

The CPI: The consumer price index (CPI) is considered an accurate representative of the cost of living. It covers the retail prices of 375 items in 71 markets of 35 major cities. Table 1 summarises the changes in the CPI over the last 16 years. Let us, for a moment, not make any attempt whatsoever to question the validity of these price estimates and accept them as they stand. What do they show?

Pakistan evidently experienced a high double-digit inflation rate (on the average) between 1990 and 1997. The next seven years, on the contrary, witnessed remarkable price control with the prices rising at less than five per cent per annum. Inflation then began to pick up yet again hitting 9.3 per cent in 04-05. It was, however, somewhat lower in 2005-06 when compared to 04-05.

Not withstanding comparisons, the price rise for 2005-06 was registered at eight per cent which is not low in absolute terms. Contrary to the factual position, have a look at the claim made by the latest ‘Economic Survey 05-06’ of the government. ‘Among the more welcome developments during fiscal year 05-06 was the significant abatement of price pressure….’ (p. 117)

While as a common citizen one can have the least doubt that an easing of price pressures would be much more than a welcome development, the official statistics themselves fail to provide any basis for the preposterous claim. By no means can a one-percentage point reduction in inflation rate over the year be labelled as ‘significant abatement’.

This discussion establishes our first premise that there indeed has been a spurt in inflation since 04. Let us now delve deeper into the sub-categories of the CPI basket. The analysis might help determine the highest contributors towards the acclaimed dampening of the inflationary pressures.

Non-food inflation: The accelerating trend in the prices of non-food goods/services could not be arrested during 05-06 (table 2). To comprehend the current non-food inflation rate of 8.8 per cent in a better way, we can break it up further and examine its more important components. Expenditure on house rent, energy and transport carries an approximate weightage of two-thirds for the computation of non-food inflation. All three witnessed high inflation in 05-06.

The price increase in energy (14.7 per cent) and transport (9.5 per cent) was substantially more than that in 04-05. Though the house rent component of the CPI registered a marginal decline when compared to the last year, it still stayed in double digits. It is, hence, reasonable to assume that the threatening level of non-food inflation is largely triggered by expensive energy, transport and house rents.

Very evidently, this is likely to play havoc with the household budgets of the lower and middle classes. Particularly, in case of the house rent, nearly all the burden is to be borne by those who do not have their own houses. This is a recipe for greater inequality in a socio-economic milieu groaning under the burden of inadequate provision of housing for an exponentially multiplying population.

Food inflation: There may not be many takers, outside the official circles of course, of the latest estimates of food inflation. Table 3 would have us believe that the upward trend of food prices (noted at 12.5 percent in 04-05) has mitigated to a moderate seven per cent. Certainly, the common perception over the last year or so has been that prices of a number of essential food items are simply spiralling out of control. The sugar crisis immediately springs to the mind. The intriguing aspect demanding greater attention is what do the official figures have to say about changes in the prices of specific food items.

Table 4 depicts the officially recorded prices of more than a dozen essential commodities for 05-06. The meteoric rise in prices of pulses (moong and mash) is immediately noticeable. So is the 32 per cent price hike for sugar. The prices of vegetables and milk have shown a moderate increase. Wheat and rice do not seem to be posing any inflation threat whatsoever. The only steep fall in food prices seeps into the CPI courtesy chicken-related items ? meat and eggs. The figures denote an approximate reduction of 24 per cent in chicken and that of 44 per cent in egg prices between July 05 and April 06.

Does the ‘price list’ suggest a subsiding food inflation not to be pestered about? It appears that the government preferred to hide behind a manipulated ‘average’ which only remotely captures the impact of higher food prices. First, this ‘average’ threatens to overlook the unprecedented price hike for pulses feverishly eaten by the less fortunate. Secondly, the ‘average’ benefits enormously from the falling prices of chicken-related items.

The fact conveniently overlooked is that the usage of chicken and eggs was far below the normal level despite lower prices due to the ‘bird flu’ scare. So, the consumer gain from the lower prices of chicken meat and eggs was extremely limited. However, for calculation purposes, the expenditure weightage of chicken/eggs was considered constant between July 05 and April 06. The phenomenon thus served to paint an unrealistically rosy scenario of overjoyed consumers benefiting heavily from the lower price levels.

Worse still, the misleading numbers fail to capture the heavier price burden faced by those who had to substitute chicken with beef and/or mutton. It is evident from Table 4 that there was an increase of more than 11 per cent in the prices of both beef and mutton. The higher prices in themselves are reflective of the greater demand pressure and more consumption entailing greater inflationary burden on the consumer.

The ‘Economic Survey 2005-06’ predictably stays clear of any insight into the ‘dynamics’ of food inflation in Pakistan. It instead goes on to make an extremely enlightening comment about the overall scenario of food prices: ‘Most importantly, the price of wheat flour remained unchanged during the last 10 months.’ (p. 123)

The significance of stable wheat prices is being blatantly highlighted here to initiate us to the make-believe price world of the learned managers of our economy. The implicit current is to show up some trump in favour of the acclaimed low food inflation numbers. After all, it does not ‘seem’ to be so moderate to a neutral observer.

Our brief statistical sojourn demonstrates how a single CPI number hides more than it reveals. The break-up into the sub-categories of the CPI basket renders the picture clearer. Undoubtedly, the consumer is encountering a price burden which is only reflected partially in the eight per cent inflation level for 05-06.

In particular, the galloping prices of several necessary food items, higher energy, transport and housing costs are adversely affecting the already vulnerable lower and middle classes in no small measure.

Glancing through the meticulous price computations of the government, one cannot help but recall the apt observation of Benjamin Disraeli: ‘There are three kinds of lies: lies, damned lies, and statistics.’