Inflation highs

Pakistan has been trapped in a vicious inflation/currency depreciation spiral for quite some time now, but the situation has hit a new low. Economically speaking, the relatively high consumer inflation is fuelled by rupee devaluation, which itself feeds into higher domestic inflation – a classic catch-22 for fiscal policy designers. The rupee losing value against the dollar, though positive for exports, is adding to the inflationary pressures as the impact of imported inflation becomes more pronounced. Even if there is no change in world energy prices, a minor depreciation in the local currency versus the greenback can fuel headline inflation higher. The soaring international commodities and energy markets are massively adding to Consumer Price Index (CPI) based inflation in Pakistan. The finance ministry has, in a latest report, conceded to the fact that surging world commodity prices and a massive rupee depreciation are worsening the inflation situation in the country. In fact, the depreciation of the rupee – both against the US dollar and on a trade-weighted basis against the currencies of Pakistan’s main trading partners – is a reflection of the inflation differential between the country and its main trading partners.

In the short run, the country’s economic managers can try to slow down this vicious cycle through restrictive fiscal and monetary policies, coupled with measures that restore market confidence. CPI-based inflation escalated to a 28-month high of 13.8 per cent for May 2022 – the highest level since January 2020. In the first eleven months (July-May) of this fiscal year, average inflation clocked in at 11.29 per cent compared to 8.83 per cent in the same period during the last fiscal. The Sensitive Price Index stands at 14.1 per cent and the Wholesale Price Index at 29.6 per cent, clearly indicating tougher times are ahead if policymakers remain at a loss on how to tame this feral inflation.

There are some interesting aspects when gauging inflationary pressures, which need to be properly investigated to ascertain facts. The Pakistan Bureau of Statistics data shows that the average price of wheat flour in Lahore was around Rs1,082/20kg, while in Islamabad it was Rs1,288/20kg – a first-time difference of Rs206/20kg. In May 2022, electricity prices were 15.5 per cent lower than April 2022, and 11.8 per cent cheaper than the same month last year. While computing SPI numbers, released on May 26, the PBS used minimum and maximum wheat flour prices of Rs980/20kg for all cities of Punjab except Rawalpindi, where the minimum was same but the maximum was Rs1,352/20kg, a gap of Rs372 within the jurisdiction of Rawalpindi. Earlier, in May 12 and other weeks for calculating SPI, wheat flour prices in Punjab were shown between Rs1,300 to Rs1,400/20kg. That means the price reduced by Rs320 plus per bag in a couple of weeks in accordance with the price data captured by the PBS. These anomalies require a thorough investigation to find out the exact situation on the ground. In the wake of the government’s plan to withdraw the unfunded fuel and energy subsidies, inflation is set to become even trickier. This leaves the wizards of the economy with no option other than planning well-defined targeted subsidies to cushion the most vulnerable population from the most devastating price shocks ever.