Inflation and its discontents

Published February 11, 2023
The writer has been a member of several past economic advisory councils under different prime ministers.
The writer has been a member of several past economic advisory councils under different prime ministers.

PAKISTANIS are experiencing the most severe cost-of-living crisis in their lifetime. Since April last year, official consumer price inflation has recorded a cumulative increase of 33 per cent (annualised). This means that if a Pakistani was earning Rs100,000 a year ago, his or her nominal income has a purchasing power today of Rs67,000.

For the approximate median income in Pakistan of Rs30,000 some 10 months ago, the equivalent purchasing power is now only Rs20,100. The speed and magnitude of the evaporation of purchasing power and decline in living standards over the past 10 months is unprecedented.

This, of course, is the situation for those lucky enough to still have jobs. A wave of unemployment is sweeping across the country, as business after business shuts down due to the economic slump.

While official figures on unemployment are available with a two-year lag, and are highly unreliable at best, estimates from leading economists suggest that up to two million people may have lost their jobs since last year. If correct, this figure, which is in line with my own estimate, would push the official unemployment rate to 9.1pc, from the last reported 6.3pc.

To gauge the economic distress felt by ordinary citizens via the twin impact of inflation and unemployment, US economist Arthur Okun constructed a Misery Index in the 1960s.

Originally dubbed the Economic Discomfort Index, it is simply a summation of the unemployment rate (seasonally adjusted) and the inflation rate. It is a simplistic and crude measure of the economic well-being of a nation’s citizens. Applying this measure to Pakistan reveals that the Misery Index (using the last available or estimated annual unemployment rate without the seasonal adjustment, and the last available year-on-year inflation rate based on official headline CPI), stood at 19.7 as of end-March 2022, and has since nearly doubled to 36.7 as of January 2023.

The impact on the lives, livelihoods and overall well-being of fellow citizens has been brutal. In my own personal experience, over the past year I have had complete strangers approach me on the streets for financial assistance to help pay rent, pay their electricity bill, buy petrol, purchase groceries, or buy something to eat for their children.

The worst cost-of-living period on record is morphing into a social and public health crisis.

Mostly this has included people who do not appear to have resorted to asking strangers for help before. My most unforgettable experience was coming across a well-attired senior citizen standing outside a grocery shop, looking disoriented and holding a piece of paper.

Fearing that he may be senile and lost, with the piece of paper containing written directions to his residence, I approached him and asked if I could be of assistance. Embarrassed, he told me he needed to buy the groceries listed on the paper for his widowed daughter and her young family. Economic indicators, however well-meaning, can seldom capture the full enormity of the devastating impact on people’s lives of economic downturns, inflation, unemployment and ‘adjustment’ under IMF programmes.

From media accounts as well as anecdotally, a picture emerges of life-altering outcomes for thousands of families across the country. Hunger and undernourishment, household budget choices and cuts, economic despair, children being pulled out of schools, household earners taking on additional burden and stress with multiple low-paying jobs, others being forced to give up decent paying jobs because they could not afford the commute anymore, elective healthcare being deferred, while in some cases even critical life-supporting care becoming unaffordable, etc. These are some of the everyday struggles of Pakistanis in 2023.

The unfortunate side of this picture is that some of the adverse effects are long-lasting if not permanent, such as children being dis-enrolled from school or households being tipped into poverty.

Food inflation in countries such as Pakistan has a direct bearing on poverty outcomes. According to work done by ADB in 2008, food inflation of 30 per cent was projected to translate into 22m additional Pakistanis below the poverty line. Year-on-year CPI food inflation for January 2023 was recorded at 39pc for urban consumers and over 45pc for rural households.

While the costs of inflation are traditionally viewed purely in financial or monetary terms, protracted periods of high inflation have multifaceted impacts. Among the most pernicious perhaps, and the least studied, appears to be public health. A prolonged cost-of-living crisis can morph into a public health crisis prima facie via two channels.

The first is the substitution of fit-for-consumption foods by lower quality items or adulterated ingredients that are barely edible in order to keep the price increases affordable. This accompanies the practice of reducing the weight of items or size of servings while charging the same price, known as ‘shrinkflation’. For these reasons, officially reported inflation has a bias towards under-measuring the true rate of price increases.

Perhaps the more insidious channel through which periods of high inflation can affect public health is via its effect on stress levels and mental health. The constant tension of trying to balance household budgets in severely testing times such as these, or meet the spoken as well as unspoken expectations and demands of family members, places an unimaginable toll on the well-being of breadwinners.

Chronic stress can lead to a range of severe illnesses such as hypertension, cardiovascular disease, diabetes, and depression among others. Many people turn to smoking or drug use as a means of coping.

The overall impact can be compounded by already elevated pre-existing levels of psychosocial toxicity in society.

In conclusion, the extraordinarily high inflation we are experiencing is having a deep and pernicious impact on large swathes of society. Due to reasons of space, I was not able to address the causes of the high inflation episode Pakistan is experiencing as well as the possible mitigation strategies that can be adopted, both at a governmental as well as individual level. I shall do so in a subsequent article.

The writer has been a member of several past economic advisory councils under different prime ministers.

Published in Dawn, February 11th, 2023

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