Stagnant wheat, rice prices kept inflation low during PML-N rule

LAHORE: It was mainly because of almost stagnant wheat and rice prices that inflation remained subdued during the five-year rule of Pakistan Muslim League-Nawaz (PML-N), as these two items carry the highest weight in the food basket.

It is said that lower global petroleum prices facilitated the PML-N government in keeping inflation very low during its tenure. It is only partly true, as the global crude oil rates declined very sharply in the first two years of this regime. Now, the price of global crude is on the rise again, almost double from the low of $40 per barrel in 2014-15. Despite that, inflation remains in the comfortable zone – much below the government target of 6 percent.

Government borrowing- to cover the huge budget deficit, rising petroleum rates and declining rupee value are the factors that should have increased inflation, but in May it was 4.2 percent and average inflation of this fiscal year remains below 4 percent.

The Consumer Price Index that determines the level of inflation is calculated on the basis of prices of different items consumed by the families in certain period when compared with the prices in the corresponding period of the preceding year.

Among the major components that determine the CPI, food has got the highest weight of 40.34 percent in these items; the weight of house rent is 23 percent, transport and communication 7.32, fuel and lighting 7.29 percent, and apparel and footwear 6.10 percent.

Grains that consist mainly of wheat and rice have more that 50 percent weight in the food basket. The rates of wheat are linked to its support price announced by the government.

When the Pakistan Peoples’ Party (PPP) government was in power, it increased the wheat support price every year starting with Rs750/40Kg in 2008-09. It increased the support price to Rs850 in 2009-10, Rs950 in 2010-11, Rs1,050 and Rs1,150 in 2012-13. Basmati rates during that period averaged Rs130/kg. It was also the period when the global oil prices were rising.

The combined effect of rising food and crude oil prices played havoc with inflation. The rupee was sharply devalued in the first year of the PPP regime from Rs62 against a dollar to Rs84 per dollar.

The result was that inflation touched 24.3 percent in July 2008, in which the non-food inflation was 33.8 percent and food inflation was 17.3 percent. The overall all inflation remained much lower than non-food inflation of 33.8 percent, because the food inflation having a weight of over 40 percent in CPI index was higher than non-food inflation.

When this regime assumed power, not only did the global crude oil prices nosedive, but the global commodity rates also sharply declined.

Despite this reality, the wheat support price was increased by Rs100 to Rs1,250 in 2013-14 and then to Rs1,300 in 2014-15. The decline in global crude rate was so sharp that the increase in wheat rate was absorbed by the economy and inflation declined. The lower commodity rates facilitated the economy in reducing inflation. Since the price of rice is determined by market forces, its rates tumbled sharply.

Moreover, the wheat support price was not effective as it was much above the global wheat rates and the support price was only availed by those that sold their produce to the government. This also helped the PML-N government in containing inflation. In case of PPP, there was global food crisis and the wheat prices were the same as support price. After 2014-15, the PML-N government did not increase the wheat support price and the rice prices have not recovered to 2012-13 levels. This has subdued inflation. Now, crude oil rates are much higher but still lower than 2012-13 level.