The real source of inflation in Pakistan is not the increase in these three essential groups, but rather other lifestyle related items. ILLUSTRATION: JAMAL KHURSHID
Roti, kapra aur makaan, or food, clothing and shelter, is the political slogan of Pakistan. Contrary to popular belief, these three basic needs have contributed least to inflation. In fact, lifestyle changes have been driving recent inflation.
In national accounts of Pakistan, roti is an approximation for food. Kapra is synonymous with clothing and footwear, and makaan can be taken as housing, water, electricity, gas and other fuels. These three areas take up 34.8%, 7.6% and 29.4% respectively of all spending in Pakistan.
According to the Pakistan Economic Survey 2012-13, the Consumer Price Index (CPI) witnessed an annual increase of 7.8% in the fiscal year 2012-13. Interestingly, inflation in prices of recreation items was the highest at 18.3%, followed by alcoholic beverages and tobacco at 17.5% and clothing and footwear at 14.7%. Prices of food and housing related items increased by only 6.6% and 4.1% respectively.
So while food and housing may constitute a large chunk of spending, their prices have remained relatively stable compared to other goods. In fact, food items only contributed 2.7% of inflation in 2012-13. Similarly, housing related items contributed only 3.7% of inflation in the same period. While clothing and footwear had high inflation, their relatively low share of overall spending also means the impact was not that significant.
In fact, the real source of inflation in Pakistan is not the increase in these three essential groups, but rather other lifestyle related items.
The data suggests that the average consumer’s lifestyle is improving and is spending more on lifestyle products. Those who suggest that ordinary people are being hit by inflation must keep in mind that for a vast majority of the population, particularly in urban areas, the choice is between an improved lifestyle, or spending more of their disposable income, and maintaining a certain lifestyle, or saving more of their disposable income. It seems most people are voluntarily choosing the former, which some people have started calling as lifestyle inflation.
This lifestyle shift is expected in most emerging markets, and Pakistan is no exception. Because of increasing consumer awareness and improved lifestyle products, consumers are spending a higher share of their disposable income on lifestyle products.
This is particularly evident in the telecommunications industry. For example, people from all income brackets tend to change mobile handsets frequently, even if there is no real need to do so.
Lifestyle shifts can be seen in other areas too. More households in Pakistan now send their children to private schools, prefer to use private health facilities, and have started eating out more than they used to in the past. All these activities are captured in the CPI, and not surprisingly their contribution to inflation is significant.
Also to take into account is the qualitative aspect of inflation. As the quality of lifestyle goods and services improve, their prices rise. While one may be paying more now for a given quantity of a good or service, it may be the case that the increase in price is due to improved quality of the good or service.
For instance, someone may be paying more for a haircut today than five years ago. While part of the increase in price can be explained by an increase in the general price level, it is possible that the person has started going to a more expensive hairstylist rather than visiting a traditional barber. It is also equally possible that the same barbershop has improved the quality of its services, revising its price list upwards.
The crux of the matter is that while in Pakistan, the general public is creating a lot of fuss about inflation the price hike may not entirely be about roti, kapra aur makaan. It may be more to do with lifestyle changes and a strong urge on the part of middle-income groups to improve the quality and quantity of the goods and services they wish to consume.
The writer is an economist and a PhD from Cambridge University.
Published in The Express Tribune, July 29th, 2013.
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COMMENTS (10)
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Tribune: We have a problem here.
(1) According to the Pakistan Economic Survey 2012-13, the Consumer Price Index (CPI) witnessed an annual increase of 7.8% in the fiscal year 2012-13. NO. CPI clocked 5.85% in FY13. It was 11.26 and 13.31 in the years before. (See http://pbs.gov.pk/sites/default/files/pricestatistics/monthlypriceindices/2013/cpireviewjune2013_0.pdf) So god only knows which number is writer trying to quote.
(2) The writer rightly takes clothing and footwear as a proxy for Kapra, but counts the sub-index under recreation items.....quite strange.
(3) Similarly, since the writer seems to understand the importance of weights (he mentions weights in second para), it is difficult to understand why would he think that 17.5% inflation in 'Alcholic beverages & tobacco' would DRIVE inflation when in fact the sub-index's weight is only 1.41 %. This so ofcourse in addition to the fact that the price of 'Alcholic beverages & tobacco' did not inflate by 17.5 but 3.5%, making a point contribution of only 0.05 to the over CPI.
These are just factual issues, which alone should prompt you retract the story and publish a clarification.
As for the writer: umm....I understand not all economists are macro economists, and therefore one should resist the temptation of trying to act like one.
Regards
Question should be as to why lifestyle items are included in CPI for purposes of calculating inflation. God knows prices are dearer and dearer every day , for daily staples like milk, bread, flour, rice and cooking oil. What the writer is implying is that the inflation is not that high because of the lifestyle items being included. Being an economist he should be criticizing the make up of this list rather than supporting it.
Two things:
The last half a decade has not been bad for everyone. Those in the financial sector have thrived because of high interest rates. Those in the services sector have also done well. Remittances have also played their part. Then there are people who have benefited from corruption. All of these people, their employees and those they buy goods and services from have prospered. They are likely the source of the higher consumption in non-essentials.
Because of the higher cost of essentials people are saving less. This might mean that people have stopped spending on big ticket items and are instead spending on "lifestyle products".
Well the "general public", which is most of our population, and probably survives on below minimum wages, is hard hit even if theres a 3% increase in food items.
"nflation in prices of recreation items was the highest at 18.3%, followed by alcoholic beverages and tobacco at 17.5% and clothing and footwear at 14.7%." and how much is the weightage of these said items?
My concerns is that the analysis talks about only inflation, and not about the income group. A 6.6% inflation for household earning less than 8000 a month is gonna hurt more than an 18% inflation for income group earning more than 100,000 a month. Also the share of food and clothing is very high in budget. One can't exclude the household size either. So things are not that simple as shown by this analysis. A look at the PSLM data (collected at the household level) would give a more clearer picture, I suppose.
the general public is creating a lot of fuss about inflation the price hike may not entirely be about roti, kapra aur makaan.... oh really... 5 years back one litre of milk was 40% of what the price is today... now please dont call it 'Luxury' but in UK, where the writer is doing his PHD from, the price of milk hiked only 15% in last 5 years.... bless him for living in the paradox of thrift!
Similar article can be written about any country. Increase in prices of basic necessities is much lower than inflation of luxury items and increase in income of people in virtually all countries excluding small slumps here and there. Things are improving almost everywhere in the world (and much more quickly in the developing world). We should aim higher, expenditure on basic necessities should be a small part of overall expenditure so that people have enough disposable income to lead a comfortable and fulfilled life.
"Roti, Kapra, Makan" are basic necessities, high inflation for these items can have disastrous effects (making life impossible for many) but high inflation for other items also has bad effects although not as serious as for basic necessities.
seems like a story uterly using propaganda to justify PPPP previous poor performance
CPi is supposed to use the correct weights. For a PhD a strange story.