KARACHI, July 12: Inflation measured by Consumer Price Index or CPI showed 8.45 per cent increase in June 2004 over June 2003. But in full fiscal year July-June 2003-04, CPI inflation rose by 4.57 per cent over 2002-03 against the initial target of 3.9 per cent.
Inflation rose faster than targeted primarily because the economy grew more rapidly than expected (by 6.4 per cent against the target of 5.3 per cent). But another reason for higher inflation was the delayed response of the government and the State Bank to wheat hoarding.
Wheat hoarding by speculators pushed up prices of wheat, wheat flour and its by products to zooming heights in the last fiscal year, which fuelled inflation. According to data released by the Federal Bureau of Statistics or FBS, the retail price of wheat flour averaged at Rs13.37 per kg in June 2004 up 26.5 per cent over June 2003 price of Rs10.37 per kg.
The increase in the price of 10-kg bag of wheat flour was even higher-28.3 per cent, as consumer had to pay Rs123.37 per bag in June 2004 compared to Rs96.18 in June 2003. (The wheat crisis that hit the country during last fiscal year was so intense that at times wheat flour was retailed between Rs18-20 per kg in Karachi).
The flare-up in prices of wheat and its by products was instrumental in pushing up food inflation or the average increase in the prices of food items in CPI to 13.37 per cent, the highest among all groups of items in the CPI basket of 374 consumer goods and services.
Since food items carry a weight of more than 40 per cent in CPI, this big increase in their average prices played a key role in pushing up CPI inflation beyond the targeted level.
An unusually high increase in the prices of wheat and its by products had a more telling impact on inflation measured by Sensitive Price Index or SPI, which recorded a big rise of 12.63 per cent in June 2004 over June 2003. Even for the full fiscal year July-June 2003-04, the yearly increase in SPI inflation was 6.83 per cent, much higher than the CPI inflation of 4.57 per cent.
Since SPI inflation reflects the changes in the average retail prices of 53 essential items of daily use it is a better indicator of the inflation for the poor. The government could have tackled the wheat crisis that hit the country last fiscal year by taking timely administrative actions to check wheat hoarding by speculators and most influential landlords.
Similarly the central bank could have made wheat hoarding difficult by taking monetary measures on time. It did make a move in this direction by imposing 50 per cent cash margin against wheat financing. But by the time it took the step, wheat crisis had taken its toll on inflation.
Despite that, the pro-active role played by the State Bank in containing inflation during the last fiscal year through unannounced shift in its monetary policy cannot be ignored.
But had SBP been more vigilant about managing growth rates of monetary aggregates including currency in circulation, it could have defused inflationary expectations on time.
Currency in circulation or money outside the banking system grew by Rs99.6 billion or 20 per cent between July 1 2003 and June 19 2004, up from 17.7 per cent during the same period of fiscal 2002-03.
FBS data shows that inflation recorded through changes in Wholesale Price Index or WPI showed the highest year-on-year increase of 12.77 per cent in June. But for fiscal year 2003-04, yearly WPI inflation averaged at 7.91 per cent.
The WPI inflation can be loosely termed as inflation for businessmen and it impacts on CPI and SPI inflation numbers with a time lag. A high WPI inflation in 2003-04 may keep CPI and SPI inflation up during this fiscal year. The government has set the target of yearly CPI inflation at 5 per cent for fiscal 2004-05 assuming that the economy would grow by 6.6 per cent.