Is inflation finally easing?

06 June 2024

Published in: Business Recorder

Pakistan Bureau of Statistics (PBS) estimated the Consumer Price Index (CPI) at 11.8 percent in May, against 17.3 percent in April on the back of a decline in housing, water, electricity, gas and fuels (group weight of 27.03 percent) that accounted for 8.62 percent improvement in May against the month before.

Three observations are in order. First, PBS gives 19.2 percent weightage (out of 27.03) to rent – an item whose indices remained unchanged in May compared to April – a statistic that is impossible to challenge as it is unclear which localities in a city/town are taken into account.

Second, electricity charges account for 4.5 percent weightage and data suggests that the PBS takes the lowest electricity rate payable by those who consume less than 200 units per month rather than an average of the prevailing rates, which would better reflect the rate of inflation.

Be that as it may, it is relevant to note that electricity tariff has been determined by the International Monetary Fund (IMF) dictated condition since 2019 to achieve full cost recovery which, due to persistent failure of governments to improve the performance of the appallingly run sector, has focused on passing the buck onto the consumers through ever rising tariffs.

Thus, in case the fuel prices rise in the international market or if the government delays meeting its contractual obligations to the Independent Power Producers (currently at over half a trillion rupees) and if the circular debt continues to rise (2.6 trillion rupees at present), this component of CPI will become unmanageable.

Third, the government reduced the price of petrol by 4.74 percent effective 1 May and then again by 15.39 rupee per litre effective 16 May.

The price of High Speed Diesel declined by 3.8 percent effective 1 May and then again by 7.88 rupee per litre effective 16 May. This decline was not on the back of a reduction in petroleum levy which was levied at the maximum rate allowed by parliament – 60 rupees per litre on both products.

On 1 May the decline in prices was, as per the government, due to a slight improvement in the rupee-dollar parity yet by and large the rate decline in the two items was sourced to a decline in the international prices of oil.

The reduction in prices is therefore not the outcome of any domestic policy and therefore its sustainability is entirely dependent on the international oil market, which remains hostage to the ongoing Israel-Gaza and Russia-Ukraine conflict.

In addition, the decline in fuel prices automatically reduces the prices of food and non-alcoholic beverages (30. 42 percent of weightage) requiring transportation from farm/factory to market which, if one takes the seasonality out of fruit and vegetable prices, accounted for a decline in the indices – from 281.53 in April to 260.78 in May.

These observations, so claim independent economists, imply understatement of the CPI in May by about 4 to 5 percent at least, an understatement that was estimated at between 2.5 to 3 percent in April.

The CPI July-May (national) for 2022-23 was 29.16 percent, which declined to 24.52 percent for the same period of this year. This decline maybe significant for the stakeholders as inflation in double digits in developed and developing countries generates civil unrest.

The weekly Sensitive Price Index, for week ending 30 May 2024, computing prices of 51 essential commodities from 50 markets in 17 cities, was 21.4 percent, a rise of 0.11 percent from April, which did not include the decline in the price of petrol as that had been taken into account the week before while the year-on-year showed a rise in gas charges of 540 percent (another IMF condition that is likely to remain in effect).

It is, therefore, important to note that with May’s CPI of 11.4 percent and core inflation, non-food and non-energy, declining from 13.1 percent in April to 12.3 percent in May – declines that are all the more baffling as the discount rate remains a high of 22 percent – a question needs to be asked is: Is the State Bank of Pakistan (SBP) taking decisions that are not being synchronised with the decline in inflation or the inflation rate has been understated to provide a comfort level to the stakeholders though surely they understand that fudging inflation and employment figures fools no one?