February 19, 2007	Monday	Safar 1, 1428

INFLATION is a matter of universal concern for its uneven impact on various sectors of an economy, both domestic and international. Among other things, it imposes the most unfair tax on the already vulnerable, promotes concentration of wealth, is inimical to distributive justice and can effectively frustrate effort for poverty alleviation.

Inflation at a rate out of line with that of the competitors in foreign markets is not conducive to balance of payments, which, in turn, has deep implication for the economy. A realistic measure of inflation is a pre-requisite for formulating appropriate economic policies.

In Pakistan, the prevailing rate of inflation, as measured officially, is often a moot point. This is an attempt to take a close look at the existing methodology of compiling Consumer Price Index (CPI) and determine how far the existing skepticism is justified.

For compiling CPI, prices of 374 items are obtained from 71 markets in 35 urban centres. Prices are transaction prices and not the listed or tag prices. These are divided into 10 groups and each group is assigned weight generated through the `family budget survey’ conducted in 2000-01, which serves as the base year for the Index.

The groups and the weights assigned to them are : (1). food & beverages, 40.34. (2) apparel, textile & footwear, 6.10. (3) house rent, 23.43. (4) fuel & lighting, 7.29. (5) household furniture & equipments, 3.29. (6) transport & communication, 7.32. (7) recreation & entertainment, 0.83. (8) education, 3.45. (9) laundry & personal appearance, 5.88. (10) medicare, 2.07.

The Index is prepared for four income groups of (a) up to Rs3,000. (b) Rs3,001 to Rs5,000. (c) Rs5,001 to Rs12,000.and (d) above Rs12,000. The same consumption basket is used for all income groups.

The methodology used for CPI has basic limitations in regard to the scope, the size of the sample and calculations. The Index covers only urban areas with one third of the population leaving out the two thirds residing in rural areas. They are equally affected by inflation. The number of household covered by the sample of the Index is only 40,706, which is less than one per cent, at 0.07 per cent of the urban households. This is statistically insignificant.

The distribution of the households according to the incomes group covered by the Index is quite interesting. Bulk of the households-54.9 per cent, fall in the Rs5,001 to Rs12,000 group The lowest income group of Rs3, 000 has only 5.3 per cent of the households. To treat Karachi and Kunri at par and average their prices gives a downward bias to the Index. The use of the same consumption basket for all income groups gives very odd results, as will be seen later.

Can an average urban family survive on Rs.3,000 ? This can easily be judged from the Index. According to the commodity weights, out of Rs3,000 a family can only afford Rs.1,210 for food and beverages, Rs183 for apparel, textiles & foot wear, Rs703 for house rent, Rs219 for fuel & lighting, Rs99 for furniture, Rs220 for transport, Rs25 for recreation, Rs104 for education, Rs176 for laundry and Rs62 for medical care.

Within the food & beverage group, the amount available for important food items is Rs.153 for wheat flour, Rs39.6 for rice, Rs81 for meat, Rs80 for vegetable ghee, Rs58 for sugar, Rs38 for tea, Rs200 for milk (fresh), and Rs90 for bakery & confectionary. For other important items of consumption what is available is Rs131 for electricity, Rs61 for gas, Rs36 for household servant, Rs52 for petrol, Rs64 for transport charges, Rs30 for doctor’s fee and Rs32 for medicines.

It is interesting to know what the amounts can purchase in terms of quantity of goods and services. According to the wholes prices on February1, 07 (in Karachi), they could purchase 9.6 kilos of wheat flour, 1.04. kilos of either basmati (kernal) or 1.81 kilos of broken basmati or 2.2 kilos of Irri9- Sindh, either 0.6 kilo of beef with bones, or 0.3 kilo of mutton or 0.6 kilo of poultry meat, either 6.7 litters of fresh milk or 0.8 kilo of Nido, 0.9 kilo of vegetable ghee, 1.8 kilos sugar and 1.4 grams of tea,

Can an average urban household with 7.1 persons physically survive on these meagre provisions for whole one month? The per capita consumption of wheat flour, on the basis of CPI comes to 1.35 kilos. Moreover, for commuting to work a person can use public transport at the minimum charge of Rs5 for just one bus-stop and can move out of the house for only six times or one week.

Similarly, hardly one litter of petrol can be purchased. What kind of doctor can be consulted today who charges Rs.30 as his\her fee and how many medicines can be purchased for Rs32 during a month? The situation is simply ridiculous.

The application of same commodity weights to all income brackets, creates oddities. For instance, in the income above Rs12,000, per capita consumption of wheat flour is four times that of the lowest income bracket. This is obviously preposterous. The cost of education comes to Rs284 but the fee and numerous other charges of classy English medium schools where their scions go are many times more and the fabulous private tuition fees are extra which is a must. They both run in the thousands. Interestingly, the expenditure on petrol works out to Rs207, which cannot buy even four litres of petrol at the present price. The vehicle costs them Rs32 per month.

The million-dollar question is, how the common man can survive in this situation?. First of all, the declaration of incomes is suspect. Then there are supplementary undeclared incomes by moonlighting, sending family members to work, including small children to sweat shops. Finally, there is certainly a marked reduction in consumption of expensive food items. For instance, animal protein has practically disappeared from the diet of the poor and available to him at marriages and Eid-ul-Azhas.. For want of milk, children remain undernourished and are exposed to health risks. In extreme cases, there is a new phenomenon of suicides and that too by those whose religion strictly prohibits this extreme act of despair and warns of severe punishment after death.

The urgent need to take a fresh look at the compilation of CPI to make it realistic and credible is obvious. The CPI should be labelled as Urban CPI, which it is and a new Index be prepared for rural areas where the bulk of population of the country is. Their welfare should be no less, if not more, dear to the economic managers. It would be helpful if there is a sub-index for metropolitan areas where the consumer basket is quite different from the rest of the smaller urban areas. The size of the sample should be increased to make it significant by the established standards of statistics. Instead of taking a simple average of commodity prices, it should be weighted by population of the reporting centres.. Commodity weights should be according the consumption baskets of various income groups which are quite different.

The phenomenon of inflation cannot be properly understood without identifying the impact of forces bearing on demand and supply and hence the concepts of “demand pull’ and ‘cost push” inflation. In Pakistan, the discussion is mostly confined to the demand side and the supply side, particularly the cost of production, is not given due attention.

Pakistan economy is exposed to international influences so much so that its foreign trade accounts for as much as 33.4 per cent of GDP and this is going to increase further with economic growth and trade liberalisation.

At the same time, domestic utility and other inputs costs also show significant increases. The overall impact can be measured only with a Producer Price Index. This is conspicuous by its absence, the earlier it is prepared, the better for economic management.