Why govts cannot control inflation?

In absence of inflation-led growth, it will be very hard to show economic progress

ISLAMABAD:

There are three reasons – first, they are not willing to control inflation beyond a certain point; second, they are willing but not able to control; and third, they are willing and able but not capable of controlling consumer-led inflation due to “me-too spending syndrome”.

Let me explain each of the aforementioned reasons in detail.

Sometimes, inflation is good, at least for finance ministers. Pakistan is not in that category, but some stagnant economies such as Japan and Switzerland welcome any inflationary trends, however, the rate of inflation in such situations ranges between 1-3%.

In an economy like Pakistan, which lacks real and productive sectors and grows on rather shallow sectors such as real estate, consumer finance, etc, inflation is not only inevitable but economic growth targets are achieved mainly through inflation.

In the absence of inflation-led growth, it would become very hard for any finance minister, in Pakistan, to show economic progress. Therefore, finance ministers and monetary policy officials are not willing to control inflation unless it gets out of control.

Read: Inflation skyrockets to 11.1% in April

In recent times, inflation has been tolerated as long as it stays in single digit.

Moving on to the ability to control inflation, in this regard a price magistrate may be more effective than a finance minister.

There is no denial of the important role that federal and provincial finance ministers play in setting policies and priorities, but the devil, of inflation, is in the details and only a ground-level implementation could get hold of this devil.

The Consumer Price Index (CPI) tracking and price-setting of basic commodities happens at federal and provincial levels and implemented in major cities.

What about small towns and far flung areas? How could one be sure that government rates are being applied in Sibi, Bisham, Ghotki, Layyah, Parachinar and Rawalakot. The only way, to have an effective and wider implementation of price control and related measures, is to ensure a transparent and honest price magistracy system.

Another point in this regard is to expand the scope, frequency and accuracy of CPI. The current one is quite archaic and mostly prepared by statisticians sitting in their offices by believing in prices determined by deputy commissioners, rather than prevailing market prices.

The third and most important is “consumer-led” inflation, which is a unique phenomenon in Pakistan. It is certainly not a demand-pull inflation, as for that there needs to be more demand than supply.

It is rather the “me-too spending syndrome”, ie the burgeoning upper middle class finding their class refuge and consumer satisfaction by spending extra or premium for the same products, mostly through premium outlets.

For example, the same food commodities, including fixed price company products, are sold at higher prices in big retail stores located in malls, than in ordinary retail shops. And there is a class of society that actually wants so, to prove their class apart.

Such a tendency has a trickle-down effect and is spreading across the product and commodity lines and giving rise to a tiered, with respect to premium pricing, system of retail outlets, thus contributing towards inflation that could not be checked or accounted for. No finance minister can intervene, or control, in this type of inflation.

We are a nation that likes headlines, bold and often unsubstantiated statements, thus political slogans, statements and blame shifting have been in vouge rather than taking the issue of inflation upfront and at its core.

Macro-level economic management works in disciplined and documented economies, not in Pakistan yet. Deliberations in Islamabad, briefings in Lahore and meetings in Karachi are divorced from realities in Jacobabad, Chichoki Maliyan, Mardan, Mirpur and Awaran.

One needs to get on the ground and tackle ground realities for an effective economic policy implementation, including inflation control.

Read more: Rising inflation worries Pakistanis: survey

Another point to ponder is whether we have an accurate inflation calculation mechanism in place. Inflation is calculated based on official prices of a pre-determined basket of goods, which is fair enough and as per global practices.

However, the difference is in the inaccurate capturing of prevailing prices and static nature of the essential commodities’ basket, ie not changing it as required.

If one goes by the official inflation figures and price hike of basic food items over the last few years, let’s say from 2016-20, the prevailing market prices are much higher than the prices one may arrive at by applying the official inflation figures.

Where did this “hidden inflation” come from? Is it deliberate underreporting or simple lack of capacity to capture?

Inflation is a socioeconomic issue in Pakistan and needs to be addressed through a comprehensive socioeconomic response and an effective and transparent implementation mechanism on the ground.

At the same time, we need to educate consumers to behave rationally and get out of the “me-too spending syndrome”.

The writer is an international economist

 

Published in The Express Tribune, May 3^rd, 2021.

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