Inflation is one of the crucial economic variables with far-reaching implications for the performance of an economy and welfare of the common man.

It is unrealistic to expect stable prices in the sense of no change. The rate of inflation, if tolerable and not much out of line with the international trend may help mobilize idle resources, increase production and employment in the country and encourage vibrant trade relations with rest of the world.

Otherwise, it would upset economic calculus and the resultant uncertainty may induce unproductive economic activity retarding economic growth. The exchange rate will be adversely affected, leading to or adding to the existing pressure on balance of payments position by inducing imports, while actively discouraging exports, making them less competitive in international markets. The greater the exposer of an economy to international factors, the more serious will be this impact.

Ultimately, there will be a serious welfare loss of those with fixed or less flexible incomes. The redistributive effect is a greater concentration of income and wealth, which simply results in poverty among the masses. With this perspective, the way inflation rate is calculated and reflects the changing reality on ground, or its realism, is of great importance for triggering policy response from economic managers setting in motion a virtuous or vicious circle.

Of late, authorities in Pakistan have embarked upon a policy of cutting the return on NSS and the argument advanced is that the real rate of return, that is normal return adjusted by the inflation rate, is very high, despite the reduction. This is on top of government claim of having successfully maintained a low rate of inflation. There is a general skepticism about the official measure of inflation.

The common feeling based on individual perception, is that this does not reflect the reality on ground. The feeling is so common that the State Bank had to comment on this and devote a Box in its Annual Report for 2001-2. The Report observes, “Despite visible deceleration of inflation recorded by various indices, general perception about inflation remained skeptical and dismissive of the official figures that are compiled by the Federal Bureau of Statistics (FBS)”. Price data compiled by the FBS is one of the most reliable among various data in Pakistan. The negative perception can be addressed by dissemination of compilation methods and full disclosure of price data along with the results of the Family Budget Survey.” The footnote reads, “FBS has never published the results of the Family Budget Survey, which is undertaken to recompose the consumer basket. Although the pamphlets explaining the compilation methods are available, importance of all consumer items in terms of their weights had never been disclosed.” (p.51) The Box is entitled, “Why are Consumers Skeptical of Official Inflation Figure?” It explains the concept of weighted average. (p.60).

It is a hard fact that all prices do not change at the same time and to the same extent and the individual is affected by the change according to his unique personal situation determined by a whole host of diverse doctors, like age, source of income, nature of assets-real as well as financial, size of family, in its wider sense of including all dependents,and its composition, the number of school going children, location whether rural or urban small or big in size, owning conveyance or depending on public transport in case of a metropolitan city, residing in a rented or own house, etc.

It is obvious that it would not be possible to measure inflation according to the each individual consumption basket and only truly representative broad categories of population can be taken into account. So, for developing a measure of inflation the factors to be taken into account are size of the sample of the population to be surveyed, the consumption basket for each group of the population covered and importance attached to each element included by way of weightage, accurate reporting of price fluctuations and its periodic revision to reflect the changes in the existing products as well as services and the emergence of new ones. The measure of inflation is in the form of index, for which an appropriate normal year is to serve as the base.

The base of the consumer price index (CPI) has been recently changed. In the past for such a development a booklet used to be issued by FBS giving the details of the methodology. However, no such publication is available so far. When informally contacted for details for the purpose at hand, FBS official concerned indicated that whatever was to be made public is given in the FBS monthly statistical bulletin. This is transparency in reverse gear. The Bulletin for January 2003 has been, therefore, relied upon.

The current CPI uses the fiscal year 200-1 as the base. The cities covered are Lahore, Faisalabad, Rawalpindi, Multan, Gujranwala, Sialkot, Sargodha, Islamabad, Jhang, Bhawalpur, Okara, Jehlum, D.G. Khan, Mianwali, Attock, Samundri, Vehari, Karachi, Hyderabad, Sukkur, Nawabshah, Larkana, Mirpurkhas, Shahdadpur, Kunri, Peshawar, Mardan, Abbotabad, D.I. Khan, Bannu, Quetta, Khuzdar, Turbat and Loralai. The index is prepared for four income groups and they are Employees with income up to Rs3,000; from Rs3001 to 5,000; from Rs5,001 to 12,000 and above Rs 2,000.

Consumer Basket (Table)

There are major apparent omissions in the coverage of the Index. A few examples might suffice. In the food group, in earlier Index cigarettes were taken into account but have been excluded from the revised Index. Whatever be the moral and health view of smoking, as long as people smoke and incur sizable expenditure, this should be reflected in the Index. Conspicuous by its absence from the basket in the Education group is the cost of school uniform and school transport. It has been assumed that all students go to government institutions and pay the nominal tuition fee, whereas there is now a plethora of private institutions, mostly elite English medium. It seems to have been believed that MBBS doctor can provide cure for every disease and there is no need to go to specialists or for hospitalization.

Some of the group weights simply do not make much sense. The prime example is Education, which enjoys a weight of 3.45 per cent as compared with 6.10 per cent for apparel, textile and foot wear, 5.88 per cent for clearing laundry & personal appearance. Within the latter group, cosmetics, hair cut, beauty parlour and soaps cost more than Education. Household furniture and equipment comes close with 3.29 per cent. Medical care is placed at 2.07 per cent. Medicines cost more than consultation with doctor.

The elements of tuition fee and their average cost in December 2002 were; school fee primary Eng. Med. Rs397.25; school fee, secondary Eng. Med., Rs509.79; govt college fee 1st year, Rs38.04; govt college fee 4th year, Rs51.82; Govt. University Fee MSC, Rs 127.98; govt Med. college fee MBBS. Rs487.48; govt. Eng. college fee 1st year, Rs742.79. There is a new phenomenon of self-financing involving a fabulous amount, running into lakhs. The existence of private educational institutions with high cost is ignored, even though they can been seen in almost every street in big cities and are quite significant in terms of number of students.

Education is an important expenditure in urban areas, where there is a general awareness of the need for education. As a result, the literacy rate in urban areas is much higher than the national rate. Another important demographic feature in Pakistan is the predominance of young population. Those up to 15 years claim about half of the total population. Their proper education requires quite an expense by the family as well as the State. The Index treat school uniform as part of apparel, textile and footwear and not of education. Significantly, as pointed out earlier, there is no mention of cost of transportation to school college, whether by public transport or by school college contract bus or on own transport. They all cost a tidy sum.

Gone are the days of “salayt”, “takhti”, and “qalam”, and ordinary clothes of daily use for school. This is the twenty-first century and the age of computer. School children in urban area are seen lugging school bags nearly as heavy, if not more, as their own body weight. In many cases, there has to be help through private tutors. What is included in the Index is quite inadequate to educate one child while there are generally more than that.

Let us see whether an average family in urban areas can even feed itself according to the CPI. What quantity of food items can be purchased according to Index in the lowest income bracket in two cities, one very big and the other quite small is given in the above table. Taking the average price of all the centres, a family with that income can buy 14.18 kilos of wheat flour, 1.26 kilos of Basmati rice, or 3.30 kilos of Irri rice, 1.4 kilos of beef, 14.47 liters of milk, 2.84 kilos of sugar, 175 grams of loose tea. It is stating the obvious that this cannot sustain a family of 6.8 persons as revealed by the 1998 census, for a month.

Here is another way of looking at it. A person needs at least Rs 6.72 for going to work and back, Rs 4.04 for two chapatis. Rs 12.63 for a plate of cooked dal and Rs 4.33 for a cup of tea for lunch every day of work. A packet of K2 cigarette will cost Rs 6.20. All this adds to Rs 33.93 per day. Over a month, consisting of 26 days, this unavoidable expenditure comes to Rs 881.92, leaving Rs 2,118 for the whole family.

The first question that arises is: If this is so, how do they manage? The simple explanation in case of unscrupulous persons is corruption and the honest to God few have to resort to other supplementary sources of income, like second job or work for the head of the family and some gainful activity by the dependents like tailoring, offering tuition and what not. The privation they suffer cannot be measured, but the extreme of which is now evident in the rapidly increasing economic suicides among those whose religion strongly condemns this desperate act, so much so that the funeral prayer is not offered for the deceased.

The higher income categories of the Index do not fare any better. Taking the same weights for the highest category of Rs 12,000 and more, in the absence of any indication to the contrary, the following interesting aspects emerge. A family would buy 6.4 liters of petrol in a month at the Dec 2002 average price and less at the current price. The Index allows Rs 207.60 for communication, which does not cover even the telephone line rent, not to mention the numerous calls such an affluent family would make. The bill for electricity is Rs524.40 and for gas Rs246.00, which is obviously ridiculously low. Household servant becomes available to this group at only Rs230.40. Nothing could be more surprising than that. This is just a sample.

It appears that the compilers of CPI shut their eyes to the stark reality surrounding them and lost the wood for the trees. They have lost sight, if not ignored, the sharp difference in climatic conditions in different cities. Karachi, Lahore, Multan, Islamabad, Peshawar and Quetta cannot be treated at par with one another, as some of them have extreme summers as well as winters, some extreme in one season and in one case, the biggest, very mild throughout the year. This makes a big difference in the nature of clothes and arrangements in the house to keep it cool and or warm.

Partly, because of the inescapable climate and partly because of the very size of the town, there is a big difference in their pattern of life. For instance, commuting to work and sending children to school are very serious problems in metropolitan cities. It is, therefore, not fair to treat the big cities at par with Junri, Loralai, Khuzdar, Okara and Samundri. Perhaps more important than income groups is the categorization of cities by size of population. The following four categories would be appropriate; cities up to 0.5 million, from over 0.5 million to 1.0 million, over 1.0 million to 5.0 million, over 5.0 million to 10.0 million, and above 10.0 million population. The national Index should be weighted by this important element. This is not asking for too much. Given the availability of the data city-wise, only a short computer time will be required.

In short, the current CPI is not realistic. No wonder the intelligentsia, not to speak of the common man, views it with skepticism. A drastic revision is called for to reflect the ground realities before it becomes credible and serve as a reliable indicator for policy making.