Furious food inflation

Published February 14, 2022

In January, the annual increase in prices of essential items measured through the Sensitive Price Index (SPI) shot up to 19.5 per cent. This was the fastest ascend of SPI during the past 12 months, according to the State Bank of Pakistan (SBP).

What is even more disturbing is that throughout the year (between Feb 2021 and Jan 2022) annual pace of increase in prices of essential items remained in double digits — and between Oct 2021 and Jan 2022 it never slipped below 14pc.

Under the heap of these stats remain buried countless stories of human deprivations and miseries — and malnourishment and stunted growth of children. Because, 32 out of the total 51 essential items are basic foodstuff including wheat flour, milk, curd, sugar, rice, bread, beef, mutton, chicken, eggs, potato, onion, garlic, pulses etc. And, the remaining 19 non-food items include such necessities as firewood, electricity, phone calls, petrol, diesel — and cylinders of liquefied petroleum gas for everyday use.

To say that the government remains insensitive to the people’s problems arising out of such high food inflation would be unjust. But what is obvious to all is that all efforts to contain it have not yielded results so far. Just look at another set of numbers: in January, annualised food inflation, as part of overall consumer price inflation (CPI), rose to 13.3pc in urban areas from 11.7pc in Dec 2021. In rural areas, the pace of increase was sharper — from 9pc in Dec 2021 to 11.8pc in Jan 2022. (Overall national average CPI inflation also soared to 13pc from 12.3pc, SBP stats show).

Read more: Govt taking steps to reduce impact of inflation

Since wholesale food prices are always lower than retail prices and continue to impact retail prices with a little time lag, 12.5pc WPI food inflation in January means that the economy is bound to witness a double-digit increase in CPI-based and SPI-based food inflation for a few more months — even if it starts receding right from February

High food inflation as part of the CPI inflation combined with even higher food inflation (evident from increasing prices of 32 essential food items) mean that the lives of tens of millions of Pakistanis in the low and middle-income groups have become too difficult to carry. What is more upsetting is that one cannot expect an immediate and significant easing of food inflation.

Most food items, particularly those in the list of essential items, are price inelastic. This means an increase in their prices normally doesn’t depress their demand. This price inelasticity also keeps demand for food items intact — and growing at their natural rate — despite monetary tightening.

So, the recent monetary tightening by SBP may also have no or negligible effect on food inflation. Besides, when prices of perishable food items ie fruits and vegetables decline in case of increased fresh supplies, rising fuel prices continue to neutralise their effect on food inflation both directly as well as in the form of a higher cost of transportation. Electricity and gas prices are rising in line with the increase in international fuel oil prices and due to phasing out of energy subsidies on the International Monetary Fund’s (IMF) insistence.

Also on the IMF’s demand, subsidies on agricultural inputs like fertiliser and seeds have already been withdrawn. This means ex-farm prices of major and minor food crops including wheat, rice, fruits, veggies, pulses and oilseeds cannot be checked through subsidies — at least during the current fiscal year.

That is why we see a rising trend in wholesale food prices. In eleven out of the 12 months in the past year (between Feb 2021 and Jan 2022, food inflation as part of the Wholesale Price Index (WPI) inflation remained in the double digits. In Jan 2022 it rose to 12.5pc year-on-year from 11.7pc in Dec 2021. Since wholesale food prices are always lower than retail prices and continue to impact retail prices with a little time lag, 12.5pc WPI food inflation in January means that the economy is bound to witness a double-digit increase in CPI-based and SPI-based food inflation for a few more months — even if it starts receding right from February.

32 out of the total 51 essential items are basic foodstuffs and the remaining 19 are non-food items

One argument often made by the government for stubbornly high inflation is that it is partly a reflection of the rising trend in international food commodity prices. And, it is true. In Jan 2022, the annualised increase in the Food and Agriculture Organisation’s (FAO) food price indices for cereals, dairy and meat stood at 12.5pc, 18.7pc and 17.3pc respectively. According to an FAO press release, vegetable oils prices that had shown some easing in December rebounded with a strong 4.2pc monthly increase in Jan 2022.

All these numbers mean that imports of food items (including the food industry’s raw materials like palm, soy, rapeseed and soybean oil or staple food grains such as wheat, rice and maize or finished products of dairy and meat) all continue to cost more for the importing countries. And when prices of food items increase in international markets, it is no wonder that local prices also rise in line with them.

But keeping food inflation within reasonable levels is an important responsibility of the government of the day. And in our context, this is a shared responsibility of both federal and provincial governments. Sadly though, lack of effective coordination between these two tiers of the government so vital for checking hoarding, smuggling and profiteering — and near absence of the third tier ie local governments — creates room for food inflation to keep growing.

Inflation, in general, and food inflation in particular shows a rising trend amidst heightened political uncertainty and the resultant weakening of the government’s writ. The PTI’s government, challenged by the opposition’s impending no-trust move, is facing a sort of existential threat. Inflation management in such a murky situation isn’t that easy. Or, is it?

Published in Dawn, The Business and Finance Weekly, January 14th, 2022

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