Acceleration in inflation rate



It was not long ago that the government used to boast about the deceleration in the inflation rate, terming it a positive sign in economy. The trend in prices, nonetheless, seems to have changed somewhat in the recent months. According to the latest data released by the Pakistan Bureau of Statistics, consumer inflation climbed to 3.4 percent year-on-year in the month of August, 2017, mostly on the back of increase in prices of petroleum and perishable items. The average increase was 3.16 percent during July-August, 2017 over the same period a year earlier. Month-on-month rise was 0.2 percent compared to 0.3 percent both in July, 2017 and August, 2016. Overall food inflation increased by 0.4 percent in August, 2017 due to an increase of 5.25 percent in the prices of perishable items and 1.71 percent in non-perishable products. Food prices whose prices increased the most in August included onions (+33.88 percent), tomatoes (+25.74 percent), sugar (+6.93 percent), eggs (+2.22 percent), meat (+1.92 percent), potatoes (+1.91 percent), rice (+1.6 percent) and fish (+1.06 percent). The prices of food group which carries a weight of 37.47 percent in the basket usually rise in the run up to Eid-ul-Azha but the rise was slightly higher than normal this August.

The latest uptick in inflation, in our view, should be a matter of concern for policymakers as it is a kind of regressive tax and has a very negative impact on the lives of ordinary people. Since food items carry higher prices than other products do, poor people who spend a large part of their incomes on food would be hit very severely. Their miseries could compound further because of a profound lack of employment opportunities in the market or low wages. The government budget may also suffer because a higher rate of inflation will constrain the State Bank to raise the policy rate which would increase government debt servicing liability. Another worrying aspect is that the inflation rate is not likely to abate in the near future. The present monetary and fiscal policies are highly expansionary which are likely to fuel inflationary pressures in economy sooner rather than later. The country’s current account balance could worsen further and the PKR, which is already overvalued in the market, would tend to depreciate, putting more pressure on the rate of inflation. The exogenous factors, including low prices of oil, which have kept the domestic prices depressed so far may also behave differently in future. This is not to suggest that the situation is critical but only to tell the government that price behaviour should be closely watched in order to ensure that the inflation target of 6.0 percent is met during the current year and the rate of inflation continues to be tolerable in coming years. Such a stability in prices would only be guaranteed if fiscal position of the government is improved, availabilities in the economy are adequate, monetary policy stance is adjusted properly and timely and current account deficit of the country is reduced to check the possibility of a major depreciation of rupee. We know that this is a tough task and would involve unpopular measures but a sharp rise in prices in coming weeks and months could be damaging for economy and welfare of the people.