Easing inflation

The State Bank of Pakistan (SBP) seems to have called it right again. In the last quarterly review of the economy, the central bank had said that inflationary pressures seemed to be easing a bit and that has proven to be the case. In fact, the latest figures released by the Pakistan Bureau of Statistics, for the month of April, show that the Consumer Price Index registered an increase of 5.8 per cent over the corresponding month of the previous year. This is the lowest figure recorded in almost nine years.

This is obviously good for the economy, and it is good for the people. There are several reasons why this is good. The basic premise behind why low inflation is good for the economy is because it encourages people to get their money out of safe havens and put it to work in investments.

With inflation clocking in at 5.8 per cent, there is every likelihood that the SBP will further reduce interest rates. This is going to be even better for the economy. It will force banks to pull their liquid reserves out of areas where they are earning little or no interest and lend them out to the private sector. This will — in theory, at least — spur industrial growth which will have a multiplier effect. This will also — again, in theory — discourage banks from lending to the government and, instead, focus on other areas to keep up their profitability; again, good for the economy.

The major reason for the decline in inflation — apart from the rebasing — is the way the CPI basket is configured. The most important categories are food and non-alcoholic beverages. Average oil prices have been declining for a while, or have been steady. With the just announced decrease in oil prices, the fall in inflation was inevitable. In foods, it is pretty even, with some food categories declining and others rising.

And it is expected that this downward trend in inflation will continue for the immediate term, despite government excess and over-spending.

Published in The Express Tribune, May 5^th, 2013.