KARACHI, May 29: Sensitive Price Index or SPI is showing much higher inflation than indicated by Consumer Price Index or CPI. The difference between the two inflation numbers is set to reach a historic high during this fiscal year.

A close analysis of the data released by the Federal Bureau of Statistics show that where CPI rose by 3.93 per cent in July-April 2004 over a year-ago period SPI moved up by 5.80 per cent. Thus the difference between the inflation numbers reflected by the two price indices stood at 1.87 percentage points. In July-April 2002 -2003 inflation measured by CPI and SPI was at 3.27 per cent and 3.75 per cent respectively. So the gap between the two numbers was only 48 basis points.

In other words during July-April 2002-03 the average increase in prices of 53 items of daily use covered under SPI was only slightly higher than the average increase in prices of 374 items covered under CPI. But in July-April 2003-04 the average increase in prices of these 53 items was quite excessively higher than the average increase 374 goods and services covered under CPI. What does this indicate?

This indicates that people in lower income brackets are being hit harder by inflation simply because the SPI items are so essential that even the poorest people use them-directly or indirectly.

SPI covers such essential items as wheat flour, rice, pulses, beef and mutton, eggs, bread, sugar, milk, cooking oil, tea, vegetables, items of ordinary clothing & footwear. It also covers the prices of petrol & diesel, liquefied petroleum gas and phone rents.

So when SPI inflation is nominally higher than CPI inflation it shows that the economic policies are such that do not burden poorer people in particular. But when the reverse of it happens the direction of these policies come under question. Inflation being a key macroeconomic indicator is affected by both fiscal and monetary policy. If the fiscal policies are growth-oriented and create more jobs and minimize discrepancies in distribution of national wealth then inflation may not particularly hit the poorer people. Similarly if the monetary policy is tailored to ensure that inflation does not rise beyond the level needed to achieve the targeted economic growth the entire population is spared of higher inflation.

In addition to this if the monetary policy is adjusted timely to raise the cost of business malpractice including hoarding of essential items and formation of price asset bubbles then it can dampen SPI inflation as well.

A case in point is hoarding of wheat by businessmen who found it not too costly to hoard this essential commodity because of low interest rates in the country. The State Bank did impose 50pc cash margin on wheat financing by banks but quite belatedly. Had it taken this step a bit earlier the prices of wheat/wheat flour and by-products would not have risen sharply and SPI inflation could have been checked.

The SBP took this decision on May 10 whereas wheat hoarding had started in February.

Small wonder that SPI in April shot up to 8.44 per cent year-on-year showing inflation for the poorer people higher by 245 basis points than CPI inflation that moved up 5.99 per cent.

If this trend continues-and indications are that it would not change significantly in May and June-the gap between SPI and CPI inflation during this full fiscal year would not be less than 250-300bps.

In fiscal year July/June 2002/03 SPI inflation was at 3.58 per cent slightly higher than CPI inflation of 3.10 per cent. And in 2001-02 SPI inflation at 3.37 per cent was rather lower than CPI inflation of 3.54 per cent.

In the last ten years the only time the difference between SPI and CPI inflation widened to 200bps was in 1994-95 when the two indices had moved up by 15 and 13 per cent respectively.