Inflationary trends in the economy

EDITORIAL (March 16 2009): Everybody was expecting inflationary trends in the economy to ease gradually but latest available data on price indices must have dampened such hopes. According to the Federal Bureau of Statistics, consumer price index (CPI), a key indicator of inflation, rose by 0.75 percent during February, 2009 over the previous month and was up by 21.07 percent over the same month last year. Inflation as measured by CPI had been falling since it had hit a high of 25 percent in October, 2008 but the figures for February, 2009 indicate a reversal in the trend which is clearly disturbing. The sub-index for food and beverages, carrying a weightage of 40.34 percent in the overall index, was higher by 25.06 percent during February, 2009 over a year earlier. Other indices recording significant increases were fuel and lighting (+29.77 percent), transport and communication (+21.47 percent), house rent (+18.57 percent), cleaning, laundry and personal appearance (+18.27 percent), education (+17.97 percent) and apparel, textile and footwear (+15.37 percent). Another indicator of very high inflation ruling throughout the year was a jump in the average of all the price indices during 2008-09. For instance, monthly average of CPI during July, 2008-February, 2009 rose by 23.49 percent as compared to only 8.90 percent in the same period a year earlier and 8.04 percent during 2006-07. The rise in WPI was also much higher at 24.70 percent compared to 11.68 percent in 2007-08 and 7.14 percent in 2006-07. The latest data on inflation is a cause of concern due to a variety of reasons. The phenomenon of inflation, unlike certain other concepts, is not only in the abstract but affects the quality of human life in physical terms and is, therefore, really painful. The combination is worst when unemployment is rampant in the economy, ordinary people were already living on subsistence level and inflation is driven mainly by increase in the basic food items. Unfortunately, the simultaneous existence of all these elements in Pakistan has made the lives of ordinary people extremely miserable, threatening the social cohesion of the country. In fact, increasing lawlessness and anarchy are some of the early manifestations of such a phenomenon. Also, the latest data suggests that inflationary targets fixed by the government may be hard to achieve. The authorities of the country were expecting the inflation rate to decelerate to 10 percent by June, 2009 and targeting average inflation rate at a single digit during 2009-10. Besides, a consistent fall in CPI from November, 2008 to January, 2009 had raised expectations of a substantial rate cut when quarterly monetary policy was to be announced in April, 2009. In fact, the rates on treasury bills were already down in the last few auctions. Now, if the price data for March, 2009 also exhibits a rising trend, monetary authorities of the country would have to think very hard before announcing a rate cut and the IMF may also resist such a move. Some of the analysts may argue that the inflationary tendencies are persisting in the economy due to lower availabilities resulting from a lower growth rate and compression of imports during 2008-09. Also, monetary tightening takes a considerable time to show its impact. Whatever the reasons, the reality cannot be denied that high inflation still appears to be entrenched in the economy and it may not be very wise to lower the guard at this stage. In other words, the expectations of an easy monetary and fiscal policy could be a little pre-mature. Those who argue for loosening these policies on the basis of present policy thrust in other countries conveniently forget the fact that there is no problem of inflation in those countries.