Historic fall in inflation

The rate of inflation, measured by the Consumer Price Index (CPI) year on year, rose sharply by 14.6% in January 2020. In February, the rate of increase was lower at 12.4%. This is a fall of 2.2 percentage points. On February 21, this column had also predicted that the supply side actions taken by the government would lead to a decline in the rate of inflation. But a fall as big as this has come as a surprise. Such magnitudes of change characterised only the uptrends of inflation. With the base of 2015-16, there was an increase of 1.8 percentage points in March 2019. In August 2019, there was an even higher rise of 2.1%. Again in January, the inflation rate shot up by two percentage points. In contrast, the decline in the rate of inflation has generally been less than one percentage point. The latest come down of inflation, i.e., the CPI in February 2020, is historic in the sense that percentage decline is the highest in the past 32 months. Not only that, the magnitude of the decline is larger than the magnitude of rises in this entire period.

Food prices, atta (flour) and sugar in particular, led the big push in the CPI for January. The New Year hopes were dashed by the ineptitude of the New Pakistan band. Come February and food inflation, on the whole, fell faster than it rose. In urban areas, food inflation in January was higher by 2.8 percentage points, but in February it fell by as much as 4.3 percentage points. In rural areas, food inflation rose by 4.1 percentage points in January; and fell in February by the same extent. What was behind this historic fall? One thing is obvious. If the leadership has the good of the ordinary folks closest to its heart, it can always find ways to provide succour. For decades, the country has had in place a fairly workable system to ensure a steady supply of staples and, in the event of a disaster beyond control, provide relief through subsidised sales from official outlets. The federal as well provincial governments failed to plan the supply before December, making inflation in January the likely peak of the current fiscal year. For the relief, the Prime Minister had to take charge himself to revive the Utility Stores Corporation (USC) against the wishes of his Advisor on Commerce and Industry, order action against hoarding and profiteering to the dismay of some federal and provincial ministers and approve subsidies and hold utility price rise to the surprise of his economic team. This is what has caused the historic fall of the CPI in February. With the petroleum prices cut down significantly, though wisely not to the full extent of the fall in world prices against the PM’s own protestations in the past, inflation is now likely to be on the downhill for the rest of the fiscal years.

The average inflation rate in the first eight months of the fiscal year is 11.7%. In the last two monetary policy statements, the State Bank forecast for the year as a whole was in the range of 11-12%. At a recent appearance before the Public Accounts Committee of the National Assembly, the State Bank Governor extended the upper limit of the range to 12.5%. The last Monetary Policy Committee had met before the January number was available. If the next meeting is held after the CPI for March is known, maintaining the present policy rate will be a hard sell.

Published in The Express Tribune, March 6^th, 2020.

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