Govt push for taming food inflation

Updated October 21, 2019

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The current phase of the price hike is a reflection of the macroeconomic adjustments being made. — Dawn/File
The current phase of the price hike is a reflection of the macroeconomic adjustments being made. — Dawn/File

Last week, the federal cabinet took notice of the increasing food prices, a major source of surging inflationary pressures in the economy. It ordered (administrative) steps for controlling prices of essential food items and devise a strategy to curb inflation.

The cabinet also decided to activate the provincial price control committees and deal strictly with hoarders and speculators. Even though the administration has a very limited ability to control the markets, it is good news that the government has finally realised its responsibility to deal with surging inflation and chip into the central bank’s efforts to stabilise the prices.

Inflation, a phenomenon whereby the prices of everything persistently increases, and the value of money or the purchasing power of people declines, is one of the major problems facing Pakistan for more than the last one year.

The monthly headline inflation as measured by the Consumer Price Index (CPI), which has been running in double digits since the inception of the present financial year, was recorded in September at an eight-year high of 12.5 per cent (base year 2005-06) compared with 10.6pc the previous month and 5.1pc a year ago. Core inflation — the non-food, non-energy (NFNE) inflation, also escalated to 9.2pc from 8.5pc in August and 5.8pc from a year ago.

The current phase of the price hike is a reflection of the macroeconomic adjustments being made

Measured against the new base year of 2015-16, the CPI inflation clocked in at 11.4pc, which still was in line with the forecast of the State Bank of Pakistan (SBP) that held back from cutting the policy rate last month in spite of the strong demand from the country’s business community.

According to official data for last month, urban dwellers faced a slightly higher increase of 11.6pc in prices. Similarly, the 40 cities from where inflation data is collected saw an uneven distribution of the pace of price rise. The people in Dadu, Sindh, for example, had to cope with the highest rise of 21.2pc in food prices while Mardan, Khyber Pakhtunkhwa, led in non-food inflation with a spike of 18.7pc.

In many cities, the CPI clocked in between just 5pc and 9.9pc. The uneven pace of price increase in rural and urban areas, as well as cities, is attributed mainly to different consumption patterns and income levels of households.

Financial analysts are projecting inflation to start receding into single digit from the third quarter of the present fiscal year, although the pace of increase in the prices is likely to slow down from this month, thus creating a little room for a small cut in the policy rate. The central bank is looking at a scenario where headline inflation will moderate to 6pc to 7pc in the next financial year, which will allow it to reboot economic growth to boost domestic productivity.

The inflation forecasts largely draw on the assumptions that the global oil and commodity prices will remain subdued in the short- to medium-term, no major supply shock is going to hit the economy, the twin current account and fiscal deficits will continue to shrink, and the exchange rate will remain stable despite small, necessary adjustments.

The jump in inflation comes at a high cost for the low- to middle-income groups of the population. Thus, the rising prices, especially of food, energy, healthcare, education and house rents, mean that the people in these income brackets are barely able to sustain their old lifestyle.

With the economic growth projected to slow down to 2.4pc during the present financial year with little chance of any rise in wages in the near- to medium-term, the higher price inflation is likely to bring greater pressures on people living paycheck-to-paycheck, compelling them to further cut their essential household expenditure as they struggle to get through the month.

Higher inflation equally hurts businesses by creating economic uncertainty, forcing the central bank to raise interest rates to slow down monetary expansion, impeding investment and job creation, and hurting export competitiveness.

A look at the CPI numbers since 2000 shows that prices have increased at a moderate pace most of the time — at less than 5pc for nine years and between 5pc and 10pc for six years. The only time, other than the first quarter of the present fiscal year, inflation hit the double digits was in 2008-12 when a dramatic currency devaluation accompanied by a sudden spike in global oil and food prices hit the economy, pushing CPI to 20.8pc, food prices to 23.7pc and non-food inflation to 18.8pc in 2009.

Former Lahore Chamber of Commerce and Industry president Almas Hyder blames cost-push factors — upward adjustments in administered prices of petrol, gas and electricity for managing the high level of the twin deficits, currency devaluation, supply-side constraints and higher transportation costs that led to higher food prices and increase in the house rents — for the current bout of inflation. “The current phase of inflation is but a reflection of macroeconomic adjustments being made for the last one year or more.”

According to Saad Hashemy, executive director of BMA Capital Management, the high inflation periods in Pakistan have always coincided either with currency devaluation or increasing global oil prices or a combination of both. Therefore, he adds, “the administrative actions the government is contemplating will only have a partial impact on prices, and will be limited to ending or reducing sudden periods of volatility in the market, which is important to protect consumers.”

The long-term solution to controlling the prices lies in documenting the economy, removing the irritants hampering the smooth operation of domestic commerce, and more importantly, continuing on the path of macroeconomic structural reforms to enable the economy to absorb the impact of sudden extraneous shocks like a jump in global oil markets.

Published in Dawn, The Business and Finance Weekly, October, 2019