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Inflation and its impact on the Pakistan

economy
Pak EconomyAdd comments

Jun 162009

Changes in the exchange rate and the prices of goods and services

By Parveen Zaiby

Inflation is the rise in the prices of goods and services in an economy over a period of time.
When the general price level rises, each unit of the functional currency buys fewer goods and
services; consequently, inflation is a decline in the real value of money — a loss of purchasing
power in the internal medium of exchange, which is also the monetary unit of account in an
economy. Inflation is a key indicator of a country and provides important insight on the state of
the economy and the sound macroeconomic policies that govern it. A stable inflation not only
gives a nurturing environment for economic growth, but also uplifts the poor and fixed income
citizens who are the most vulnerable in society.

Causes of inflation

It has been generally agreed by the economists that high rates of inflation and hyperinflation are
caused by an excessive growth in the supply of money. Today, most economists favour a low
steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of
economic recessions by enabling the labor market to adjust more quickly in a downturn, and
reduce the risk that a liquidity trap prevents monetary policy from stabilising the economy. The
task of keeping the rate of inflation low and stable is usually given to monetary authorities.
Generally, these monetary authorities are the central banks that control the size of the money
supply through the setting of interest rates, through open market operations, and through the
setting of banking reserve requirements.

There are many causes for inflation, depending on a number of factors. For example, inflation
can happen when governments print an excess of money to deal with a crisis. When any extra
money is created, it will increase some societal group’s buying power. As a result, prices end up
rising at an extremely high speed to keep up with the currency surplus. All sectors in the
economy try to buy more than the economy can produce. Shortages are then created and
merchants lose business. To compensate, some merchants raise their prices. Others don’t offer
discounts or sales. In the end, the price level rises. This is called demand-pull inflation, in which
prices are forced upwards because of a high demand, and excessive monetary growth. For
inflation to continue, the money supply must grow faster than the real GDP.

Another common reason of inflation is a rise in production costs, which leads to an increase in
the price of the final product. For example, if raw materials increase in price, this leads to the
cost of production increasing, this in turn leads to the company increasing prices to maintain
their profits, this kind of inflation is call cost-push inflation. Furthermore, rising labour costs can
also lead to inflation, because workers demand wage increases, and companies usually chose to
pass on those costs to their customers, this sort of inflation is called wage-push inflation.

Inflation can also be caused by international lending and national debts. As nations borrow
money, they have to deal with interests, which in the end cause prices to rise as a way of keeping
up with their debts. A deep drop of the exchange rate can also result in inflation, as governments
will have to deal with differences in the import/export level.
Finally, inflation can also be caused by federal taxes put on consumer products. As the taxes rise,
suppliers often pass on the burden to the consumer; the catch, however, is that once prices have
increased, they rarely go back, even if the taxes are later reduced.

Effects and measurement of inflation

The most immediate effects of inflation are the decreased purchasing power of the rupee and its
depreciation. Depreciation is especially hard on retired people with fixed incomes, as spending
power decreases each month. Those not on fixed incomes are more able to cope, because they
can simply increase their income. Another destabilising effect of inflation is that some people
choose to speculate heavily in an attempt to take advantage of the higher price level. Because
some of the purchases are high-risk investments, spending is diverted from the normal channels
and some structural unemployment may take place. Finally, inflation alters the distribution of
income. Lenders are generally hurt more than borrowers during long inflationary periods, which
mean that loans made earlier are repaid later in inflated rupees. Inflation weakens the function of
money as storage of value, because each unit of money is worth less with the passing of time.
The progressive loss of the value of money during a period of inflation makes the borrowers to
be less willing to use the money as standard differed payments.

To measure the price level, economists select a variety of goods and construct a price index such
as the consumer price index (CPI). This is one measure of inflation. The CPI measures inflation
as experienced by consumers in their day-to-day living expenses; it is the ratio of the value of a
basket of goods in the current year to the value of that same basket of goods in an earlier year.
By using the CPI, the inflation rate can be calculated. This is done by dividing the CPI by the
beginning price level and then multiplying the result by 100. The GDP deflator is another very
important measure of inflation as it measures the price changes in goods that are produced
domestically.

Pakistan publishes four different price indices, namely: the consumer price index (CPI), the
wholesale price index (WPI), the sensitive price index (SPI) and the GDP deflator. The CPI is
the main measure of price changes at the retail level. It indicates the cost of purchasing a
representative fixed basket of goods and services consumed by private households. In Pakistan,
the CPI covers the retail prices of 374 items in 35 major cities and reflects roughly the changes in
the cost of living of urban areas. The WPI is designed for those items which are mostly
consumable in daily life on the primary and secondary level; these prices are collected from
wholesale markets as well as from mills at organised wholesale market level. It covers the
wholesale price of 106 commodities prevailing in 18 major cities of Pakistan. The SPI shows the
weekly change of price of 53 selected items of daily use consumed by those households whose
monthly income in the base year 2000-01 ranged from Rs3000 to above Rs12000 per month. The
SPI also informs about the actual position of supply: whether the commodity is available in
market or not. If the commodity is not available, the reason for that is also recorded. It is based
on the prices prevailing in 17 major cities and is computed for the basket of commodities being
consumed by the households belonging to all income groups combined as in CPI. In most
countries, the main focus for assessing inflationary trends is placed on the CPI, because it most
closely represents the cost of living. In Pakistan, the main focus is also placed on the CPI as a
measure of inflation as it is more representative with a wider coverage of 374 items in 71
markets of 35 cities around the country. Inflation has started veering its ugly head in many parts
of the world, including Pakistan. Food inflation has emerged as the main contributor to
inflationary pressures. (See Table)

The inflation rates based on CPI, SPI and WPI for the year 2008-09 increased by 22.35 per cent,
26.33 per cent and 21.44 per cent respectively over the corresponding period of 2007-08. It
increased by 10.27 per cent, 14.09 per cent and 13.70 per cent respectively in 2007-08 over the
corresponding period of 2006-07. In 2006-07, the rate of inflation increased by 7.89 per cent,
11.13 per cent and 6.92 per cent respectively over the same period of 2005-06. An analysis of
data for last three years for the same period indicates that CPI, SPI & WPI were higher as
compared to last two years. (See Chart)

The government is cautious about inflation and thus has taken various steps to release demand
pressures on the one hand and enhance supplies of essential commodities on the other. To ease
demand pressures, the State Bank of Pakistan (SBP) has continuously tightened the monetary
policy over the last three years and more so in the current fiscal year, while to enhance supplies,
the government has relaxed its import regime and allowed imports of several essential items so
that there is a continuous flow in the supply of those important commodities. In addition, the
government increased the imports of items like wheat, pulse and sugar to complement the efforts
of the private sector. In order to provide relief to the common man, the government also
increased the scale of operations of the Utility Stores Corporation (USC) which supplies
essential commodities such as wheat flour, sugar, pulses and cooking oil/ ghee at less than the
market prices.

ALL THREE INDICES CPI, SPI AND WPI AT A GLANCE

Average July–April over same period of previous year

(Change of indices in %)

Index 2006-07 2007-08 2008-09

CPI 7.89 10.27 22.35

SPI 11.13 14.09 26.33

WPI 6.92 13.70 21.44

Source: FBS
Pak Economy: Inflation up by 26.79 percent

Jun 282008
ZAHEER ABBASI
ISLAMABAD (June 28 2008): The inflation measured through SPI was up by 26.79 percent in
week ending on June 26 against same period of last year due to surging prices of vegetable, flour
and milk. The SPI data released by the Federal Bureau of Statistics on Friday showed that prices
of 16 essential commodities, including vegetables, wheat flour, eggs, milk, and pulses had
increased during the week.
The price of one kg tomatoes increased from Rs 13.86 to Rs 15.84, potatoes Rs 19.42 to Rs
20.37, dozen eggs hen Rs 48.75 to Rs 50.67, LPG 11 kg cylinder Rs 687 to Rs 708.82, litre of
kerosene increased from Rs 55.02 to Rs 55.57. Similarly, the prices per kg gram pulse washed
increased from Rs 58.72 to Rs 59.15, wheat flour average quality Rs 22.52 to Rs 22.67, gur Rs
31.7 to Rs 31.93, firewood 40 kg Rs 238 to Rs 239.17 and kg masoor pulse washed Rs 111.88 to
Rs 112.10. The prices of fresh milk and garlic also increased during the week.

With the increase in prices of essential commodities, the dearness for the low income group of
Rs 3000 was recorded 29.74 percent more compared to last year. The increase was recorded
28.91 percent for families falling between Rs 3001 and Rs 5000 income group, 26.72 percent for
families of Rs 5001 to Rs 12000, and 23.36 percent for families having monthly income of Rs
12000 and above. This led to an increase of 0.13 percent inflation during the week.

The trend of weekly SPI during last 10 weeks as compared to the previous as well as
corresponding week of last year showed a continuing increase, escalating the difference from
23.71 percent on April 24 to 26.03 percent on June 26. The SPI bulletin, based on data of 53
items collected from 17 urban centres, showed increase in prices of 21 essential commodities,
decline in 10, and prices of 20 commodities remained stable but dearer compared to last year.

Further analysis of the data showed that prices of 11 commodities declined during the week that
included red chillies, onion, rice irri, chicken farm, rice basmati sugar, bananas, vegetable ghee
loose and mustard oil. According to the FBS, the prices of 26 essential commodities remained
stable during the week but prices of majority of them were up in double digits when compared to
same period of last year.

Source: Business Recorder, 28/6/2008

Pak Economy: Inflation highest in thirty years

Jun 122008

ISLAMABAD: Soaring food and oil prices drove inflation in Pakistan to its highest level in over
30 years in May, and analysts expect it to rise further as the government was expected to slash
price subsidies in a budget to be announced later on Wednesday.
Official data on Wednesday showed the consumer price index rose 2.69 per cent in May to stand
19.27 per cent higher than a year earlier, after a 17.21 per cent year-on-year rise in April.

“There are two factors driving inflation, high food prices and the second is the base effect of
passing the burden of oil prices,” said Asif Qureshi, head of research at Invisor Securities Ltd.
Prices of food and beverages rose 28.48pc in May, while house rent and fuel and lighting
increased by 12.05 per cent and 9.50 per cent, respectively.

Inflation is at its highest since 1975 when annual average prices rose 26.83 per cent. Analysts
said monthly data started being released in 1991 and therefore it was difficult to make an exact
comparison of inflation figures. Total budget subsidies on fuel oil, electricity, fertilisers and food
items were due to be reduced to 295.20 billion rupees from 407.48 billion rupees.
Source: The News

Pakistan's Inflation Accelerates to a 17-Month High of 15.71% After Floods

By Farhan Sharif - Oct 10, 2010 11:39 PM PT Mon Oct 11 06:39:04 GMT 2010

Pakistan’s inflation accelerated to a 17-month high after the nation’s deadliest floods damaged
crops and washed away roads and bridges, hurting supplies of farm and manufactured goods.

Consumer prices rose 15.71 percent in September from a year earlier after climbing 13.23
percent in August, the statistics department said on its website today. The median of 16 estimates
in a Bloomberg News survey was for a 15.1 percent gain.

“The impact of the floods on inflation is now on in full swing,” Suleman Akhtar, an economist at
Foundation Securities Ltd. in Karachi, said before the announcement. “If the situation remains
the same next month the central bank may further tighten the monetary policy.”

Pakistan’s central bank raised its benchmark interest rate in September for the second time in
two months to cool inflation, which Governor Shahid Kardar said is his primary task. Prime
Minister Syed Yousuf Raza Gilani estimates the floods may stoke inflation to as high as 20
percent and curb economic expansion to 2.5 percent in the year through June.

The State Bank of Pakistan’s key discount rate is 13.5 percent.

The floods, which struck on July 22, destroyed $3.3 billion of crops, according to government
estimates. Pakistan will harvest 4.4 million metric tons of rice in the 12 months starting Nov. 1,
down 35 percent from the previous year, according to a report by a unit of the U.S. Department
of Agriculture.

Gilani said Sept. 1 the natural disaster swept away 4,000 kilometers of roads and 1,000 bridges,
pushing up the cost of delivering goods and services. He estimated the inflation rate to climb to
between 15 percent and 20 percent.

Pakistan inflation stands at all-time high

May 132008

By Israr Khan
ISLAMABAD: Spiralling food prices and the weakening rupee pushed inflation to an all-time
record high of 17.21 per cent in April, a 3.04 per cent rise in consumer prices over March. In
April last year, the Consumer Price Index (CPI) inflation, a key gauge of price pressures in the
economy, stood at 6.92 per cent, the Federal Bureau of Statistics (FBS) said on Monday.
Ten-month (July-April 2007-08) average inflation also went up to 10.27 per cent against 7.89 per
cent recorded in the corresponding period of last fiscal. It is about 377 basis points above the
target of 6.5 per cent for the current fiscal.

Economic experts say that the weakening rupee has contributed to the rise in the cost of living.
Inflation dangers pose a headache for the central bank, though the State Bank has increased its
discount rate six times since 2003-04 to 9.5 per cent to control inflation.

Unfortunately, the previous political government had totally failed in controlling the rising
inflation, especially the prices of food items and the current political set-up also seems helpless
in curbing the runaway inflation as the poor masses have still not got any respite.

For each one per cent increase in inflation, more and more people fall into poverty indicating the
inflation is hitting poor consumers harder than the affluent class. Specifically, the poor are highly
sensitive to price changes in food, particularly staple food items, economists say. Households are
struggling to meet the minimum standards of living and they may have no choice but to cut down
their expenditures on health and children’s education.

Rising inflation is also making it more difficult for pensioners and low-income people living on
nominal incomes to make both ends meet. It is interesting to note that the high inflation trend in
food has been noticed since the start of the last fiscal 2006. Food inflation was in double digits,
averaging more than 10 per cent, during fiscal year 2006-07. During July 2006, it stood at 7.44
per cent, August 11.08 per cent, September 11.26 per cent, October 10.54 per cent, November
8.07 per cent, December 12.71 per cent, January 2007, 8.70 per cent, February 9.99 per cent,
March 10.74 per cent, April 9.41 per cent, May 11.31 per cent and June 9.68 per cent.

Likewise, at the start of the new financial year 2007-08, it kept the same trajectory and during
July 2007, food inflation stood at 8.47 per cent, August 8.62 per cent, September 12.97 per cent,
October 14.67 per cent, November 12.47 per cent, December 12.21 per cent, January 2008 18.25
per cent, February 16.05 per cent, March 20.61 and April 10.46 per cent.

More worrisome was the Wholesale Price Index (WPI) which during April rose to 23.50 per cent
from only 6.03 per cent in the same month of the last fiscal, which indicates further increase in
general prices in the coming months.

The main concern is that in the basket of WPI, food prices in percentage terms increased by
10.96, fuel, lighting and lubricants 7.48, manufactures 2.67 per cent and building materials 1.41
over April 2007.

The CPI covers retail prices of 374 items in 35 major cities and reflects roughly the changes in
the cost of living of urban areas. In the CPI basket, during April 2008, food and beverages
showed 10.46 percentage points increase over April 2007, house rent 2.71 percentage points,
transport and communication charges 1.33 percentage points, cleaning, laundry and personal
appearance 0.94 percentage point, apparel, textile and footwear 0.52 percentage point, household
furniture and equipment 0.28 percentage point and fuel and lighting charges 0.63 percentage
point over the same month of the last fiscal.

In a span of just one month, egg prices were up by 27 per cent, fresh fruits 26 per cent, wheat
flour 26 per cent, chicken farm 16 per cent, potatoes 10 per cent, wheat 9 per cent, gram pulse 7
per cent, basin 7 per cent, onions 6 per cent, cooking oil, masoor pulse, milk products, fresh milk
three per cent over March 2008. Likewise, transport charges were up 14.72 per cent, diesel 13.53
per cent and petrol 9.51 per cent over the previous month.

Source: The News, 13/5/2008

Pakistan's Inflation At 17-Month High On

Food Prices
10/11/2010 7:52 AM ET
TOP MARKET NEWS
(RTTNews) - Pakistan's annual consumer price inflation accelerated to a 17-month high in
September after food prices surged as the recent devastating floods destroyed farm lands and
disrupted supply chain.
Annual inflation rose to 15.71% from 13.23% in August, the Federal Bureau of Statistics said
Monday. Prices of food and beverages increased 21.24% year-on-year during the month, while
prices of perishable food items surged 53.86%.

"The recent catastrophic floods have serious implications for macroeconomic stability and
growth prospects," the country's central bank said after last month's monetary policy meeting.
The State Bank of Pakistan had raised its policy rate by 50 basis points to 13.5% during the
meeting to cool inflation.

Food inflation had jumped to 5.10% in August from July's 1.48%. The central bank had observed
that it might take two to three months for food inflation to return to normal levels. In September,
the figure edged up to 5.26%.

The International Monetary Fund said that Pakistan's economic outlook had taken a severe hit as
a result of the floods that struck in July. The agriculture sector, which accounts for a fifth of the
country's gross domestic product and employs roughly half the country's labor force, has been
particularly affected, according to the lender.

The statistical office reported that consumer prices increased 2.65% on a monthly basis and the
wholesale price index grew 2.09%. Prices of perishable food items advanced 13.69% from the
previous month.