Pakistan is still suffering from excessive inflation. In January, the country’s overall inflation, as measured by the Consumer Price Index (CPI), reached a 24-month high of 13%, as prices of practically all goods and utilities continued to rise.
Perishable and non-perishable food goods, energy, transportation, apparel, restaurants, and health were among the industries that had double-digit price increases in January 2021, according to Dawn news.
What Does Inflation Imply?
Inflation is defined as the rate at which prices rise over time. Inflation is usually defined as a wide measure of price increases or increases in the cost of living in a country.
What is the inflation rate in Pakistan in 2021?
ISLAMABAD, Pakistan, 1 February (Reuters) – Pakistan’s consumer price index (CPI) increased 13% from a year ago in January, the largest increase in two years, according to the government statistics department. According to a press statement from the Pakistan Bureau of Statistics, inflation was 12.3 percent in December.
Why is Pakistan’s inflation rate so high?
The new inflation reading may have an impact on interest rates set by the State Bank of Pakistan (SBP), which now bases policy rates on headline inflation rather than core inflation.
Analysts had projected inflation to be in the double digits, and current CPI inflation was in line with their expectations.
They projected that inflation would remain high year on year due to low base inflation last year, but that the rate would be determined by three factors: electricity prices, rupee-dollar parity, and foreign commodity prices.
An analyst at AHL, Sana Tawfiq, told Geo.tv that the inflation rate is in line with market expectations.
Tawfiq explained: “Non-food items such as accommodation and transportation caused the year-over-year increase. Furthermore, last year’s base inflation was smaller.”
The transport index increased significantly, according to the researcher, as a result of rising oil costs on the worldwide market and their spillover effect on local petroleum product prices.
“A declining month-over-month inflation rate is a positive development, and it comes on the heels of an improvement in food inflation, which fell for the second month in a row,” she said.
Following the Monetary Policy Committee meeting last week, the national data-gathering agency released the most recent inflation figures. The interest rate was kept at 9.75 percent by the committee.
The Wholesale Price Index (WPI), which measures wholesale market prices, increased by 24 percent in January, compared to 6.4 percent the previous month.
According to the PBS, the general inflation rate increased in both urban and rural areas. In January, urban inflation dipped to 13%, but rural inflation soared to 12.9 percent, compared to the same month the previous year. In January of last year, the inflation rate in urban regions was 5%, while it was 6.6 percent in rural areas.
On a yearly basis, food inflation rates in rural and cities increased to 13.3 percent and 11.8 percent, respectively. Food inflation in rural and towns was 7.2 percent and 7.3 percent, respectively, in January 2021.
The rate of non-food inflation in urban regions was 12.8 percent and 13.9 percent in rural areas, respectively, compared to 3.7 percent and 6.1 percent in the same month last year.
Core inflation, which excludes food and energy, increased by 8.2% in urban areas and 9% in rural regions in the month under review, according to the national data collection agency.
In comparison to the same month a year ago, the food group recorded a price increase of 12.82 percent in January. Prices of non-perishable food items increased by 13.77 percent on an annualized basis within the food group, while prices of perishable goods decreased by 6.43 percent year over year.
Housing, water, electricity, gas, and fuel inflation jumped 15.53 percent year over year in the last month, accounting for one-fourth of the basket’s weight.
In January, the average price of apparel and footwear jumped by 11.18 percent. Transportation costs increased by 23.05 percent (year-on-year).
According to the PBS, the price of pulse masoor increased by 6.13 percent month over month, followed by a 4.79 percent increase in gram whole, 4.11 percent increase in fruits, and over 3 percent increase in wheat. Meat and rice prices increased by 1.78 percent and 1.28 percent, respectively, in the previous month.
According to the PBS, the average inflation rate for the first seven months of the current fiscal year (July – January) was 10.26%.
Tawfiq projected that the central bank would maintain the status quo at its next monetary policy meeting, which is set for March 8. She also stated that interest rates should stay the same till the end of the current fiscal year 2021-22.
Meanwhile, Tawfiq projected that, as a result of the government’s efforts to control food inflation, month-on-month inflation will fall in the next months.
“Overall inflation will fall as the base effects fade,” she said, adding that the respite will be accompanied by a drop in food inflation.
However, the expert pointed out that there are several elements that can influence the inflation rate, such as electricity costs and the Ramzan factor.
Meanwhile, due to base effects and rising energy prices, central banks have predicted that inflation will remain high in the near term.
What causes price increases?
- Inflation is the rate at which the price of goods and services in a given economy rises.
- Inflation occurs when prices rise as manufacturing expenses, such as raw materials and wages, rise.
- Inflation can result from an increase in demand for products and services, as people are ready to pay more for them.
- Some businesses benefit from inflation if they are able to charge higher prices for their products as a result of increased demand.
What are the four different kinds of inflation?
When the cost of goods and services rises, this is referred to as inflation. Inflation is divided into four categories based on its speed. “Creeping,” “walking,” “galloping,” and “hyperinflation” are some of the terms used. Asset inflation and wage inflation are two different types of inflation. Demand-pull (also known as “price inflation”) and cost-push inflation are two additional types of inflation, according to some analysts, yet they are also sources of inflation. The increase of the money supply is also a factor.
Is inflation beneficial or harmful?
- Inflation, according to economists, occurs when the supply of money exceeds the demand for it.
- When inflation helps to raise consumer demand and consumption, which drives economic growth, it is considered as a positive.
- Some people believe inflation is necessary to prevent deflation, while others say it is a drag on the economy.
- Some inflation, according to John Maynard Keynes, helps to avoid the Paradox of Thrift, or postponed consumption.
How may Pakistani inflation be reduced?
The Central Bank and/or the government are in charge of inflation. The most common policy is monetary policy (changing interest rates). However, there are a number of measures that can be used to control inflation in theory, including:
- Higher interest rates in the economy restrict demand, resulting in slower economic development and lower inflation.
- Limiting the money supply – Monetarists say that because the money supply and inflation are so closely linked, controlling the money supply can help control inflation.
- Supply-side strategies are those that aim to boost the economy’s competitiveness and efficiency while also lowering long-term expenses.
- A higher income tax rate could diminish expenditure, demand, and inflationary pressures.
- Wage limits – attempting to keep wages under control could theoretically assist to lessen inflationary pressures. However, it has only been used a few times since the 1970s.
Monetary Policy
During a period of high economic expansion, the economy’s demand may outpace its capacity to meet it. Firms respond to shortages by raising prices, resulting in inflationary pressures. This is referred to as demand-pull inflation. As a result, cutting aggregate demand (AD) growth should lessen inflationary pressures.
The Bank of England may raise interest rates. Borrowing becomes more expensive as interest rates rise, while saving becomes more appealing. Consumer spending and investment should expand at a slower pace as a result of this. More information about increasing interest rates can be found here.
A higher interest rate should result in a higher exchange rate, which reduces inflationary pressure by:
In the late 1980s and early 1990s, interest rates were raised in an attempt to keep inflation under control.
Inflation target
Many countries have an inflation target as part of their monetary policy (for example, the UK’s inflation target of 2%, +/-1). The premise is that if people believe the inflation objective is credible, inflation expectations will be reduced. It is simpler to manage inflation when inflation expectations are low.
Countries have also delegated monetary policymaking authority to the central bank. An independent Central Bank, the reasoning goes, will be free of political influences to set low interest rates ahead of an election.
Fiscal Policy
The government has the ability to raise taxes (such as income tax and VAT) while also reducing spending. This serves to lessen demand in the economy while also improving the government’s budget condition.
Both of these measures cut inflation by lowering aggregate demand growth. Reduced AD growth can lessen inflationary pressures without producing a recession if economic growth is rapid.
Reduced aggregate demand would be more unpleasant if a country had high inflation and negative growth, as lower inflation would lead to lower output and increased unemployment. They could still lower inflation, but at a considerably higher cost to the economy.
Wage Control
Limiting pay growth can help to lower inflation if wage inflation is the source (e.g., powerful unions bargaining for higher real wages). Lower wage growth serves to mitigate demand-pull inflation by reducing cost-push inflation.
However, as the United Kingdom realized in the 1970s, controlling inflation through income measures can be difficult, especially if labor unions are prominent.
Monetarism
Monetarism aims to keep inflation under control by limiting the money supply. Monetarists think that the money supply and inflation are inextricably linked. You should be able to bring inflation under control if you can manage the expansion of the money supply. Monetarists would emphasize policies like:
In fact, however, the link between money supply and inflation is weaker.
Supply Side Policies
Inflation is frequently caused by growing costs and ongoing uncompetitiveness. Supply-side initiatives may improve the economy’s competitiveness while also reducing inflationary pressures. More flexible labor markets, for example, may aid in the reduction of inflationary pressures.
Supply-side reforms, on the other hand, can take a long time to implement and cannot address inflation induced by increased demand.
Ways to Reduce Hyperinflation change currency
Conventional policies may be ineffective during a situation of hyperinflation. Future inflation expectations may be difficult to adjust. When people lose faith in a currency, it may be essential to adopt a new one or utilize a different one, such as the dollar (e.g. Zimbabwe hyperinflation).
Ways to reduce Cost-Push Inflation
Inflationary cost-push inflation (for example, rising oil costs) can cause inflation and slow GDP. This is the worst of both worlds, and it’s more difficult to manage without stunting growth.
Who is to blame for Pakistan’s inflation?
Even if earlier regimes’ corruption contributed to the current economic disaster, the diagnosis isn’t enough to make people feel better. No one has ever denied that Pakistan has been afflicted by corruption among public officials. Ironically, under the current leadership, corruption has skyrocketed. This is evident in the country’s descent down the transparency scale.
One can wonder what the Prime Minister has done in the last three years to combat corruption. How well he handles the individuals mentioned in the Pandora Papers could be a barometer.
Other official arguments for an increase in inflationary tendency are essentially a race to the bottom. When government spokespersons compare Pakistani pricing to those in other nations and express satisfaction that Pakistani prices are still lower than some, this contradicts the current regime’s long-held and oft-repeated allegation that prices are rising due to corruption by their authorities.
According to the governor of the State Bank, the current high inflation has been driven by an increase in the rupee-dollar exchange rate. The governor appears to take pride in the fact that Pakistanis living abroad gain from the sharp depreciation of the country’s currency. The governor should have been more forthright about how the rest of Pakistanis are affected by the rupee’s fall and what it means for Pakistan’s foreign debt.
Another official argument is that Covid 19 has had a significant impact on both the domestic and foreign economies. There is no doubting that Covid 19 has claimed a large toll, and no country in the world has escaped the pandemic’s ravages. However, most of the world’s economies have recently rebounded from their prior state of stagnation. India and Bangladesh, two of our neighboring countries, have achieved great progress. Except for a rigorous lockdown in the early stages of the pandemic, Pakistan’s economy has remained relatively unaffected since subsequent lockdowns were selective and less strict than in most of the industrialized world.
Pakistan’s commitment to the IMF, under which it received $6 billion in loans in 2019, appears to be the most significant factor for the rapid increase in the prices of vital commodities. The discussion about how urgently this package was needed and how beneficial it will be to the national economy will continue.
A few comparisons will demonstrate that everything has gone as planned. Pakistan’s liquid foreign exchange reserves were estimated to be around $21 billion in 2017, but are currently estimated to be around $25 billion. External debt, on the other hand, has now surpassed $122 billion, up from roughly $90 billion in 2018. In other words, over the last four years, foreign exchange reserves have climbed by about $4 billion, but external debt has increased by $32 billion.
The amount of money spent on servicing external debt has also increased. Debt servicing jumped from $6 billion in 2018 to $11 billion in 2019, according to the most recent figures available. Even Nevertheless, there is a significant disparity between the increase of foreign exchange reserves and foreign debt. Only a portion of the problem is explained by the rise in debt servicing.
The administration has been adamant in emphasizing the involvement of a “mafia” in driving up the cost of critical goods. The FIA allegedly discovered Rs 110 billion earned by the “sugar mafia” in March of this year, and filed proceedings against Jahangir Tareen and the Sharif family, among others. Since then, prices have been steadily climbing. The continual rise in sugar prices has not slowed for the general public. This raises a number of questions about the effectiveness of governmental institutions tasked with prosecuting criminals and giving relief to the people.
Mismanagement in the procurement of liquefied natural gas has also exacerbated the problems faced by consumers. Former Prime Minister Shahid Khaqan Abbasi and former Finance Minister Miftah Ismail have been charged with creating a $2 billion loss to the national exchequer through suspected corruption in LNG procurement deals, according to the accountability watchdog. Pakistan and Qatar signed a 15-year agreement in 2016 to import LNG at a price of 13.37 percent of Brent crude. Pakistan ordered LNG cargo at 24.55 percent of Brent in September 2021, the most costly award to date. Is there anyone else who will pay for the mismanagement besides the customers? On the surface, there appears to be no hope because the masses are easy targets.
What is India’s inflation rate?
According to data provided by the National Statistical Office (NSO) on Friday, India’s retail inflation rate, as measured by the Consumer Price Index (CPI), was 6.07 percent in February 2022. According to a Reuters poll of 36 economists, the reading was expected to fall to 5.93 percent on an annual basis in February.