Is it cost-push inflation? By Nasir Jamal

Pakistan’s chance of containing inflation in the 11 to 12 per cent band, as forecast by the State Bank of Pakistan (SBP) in its last monetary policy review, looks quite dim with the consumer price index (CPI) hitting 13.26 per cent, a three-month high, in April from a year ago.

The CPI inflation during the year will be nearly 12 per cent, down from 20.77 per cent a year earlier, the SBP said towards end of March. On a monthly basis, inflation escalated 1.73 per cent from 1.3 per cent in March.

The headline inflation has breached the government’s budgetary target of nine per cent for the current financial year by a wide margin with CPI already spiking 11.8 per cent for the first ten months of the fiscal year to April. The average CPI inflation for the same period last year stood at 22.35 per cent.

Monthly core (non-food, non-energy) inflation also soared 10.6 per cent from 9.9 per cent in March.

“The (recent) rise in inflation is serious in nature,” Asad Farid Khawaja, an economist at AKD Securities tells Dawn. “Inflation will remain a major concern for the central bank, which will at best leave its key discount rate unchanged at current level of 12.5 per cent in its next monetary policy review later this month even if it does not raise the credit cost.”

The SBP has been delaying monetary easing on the back of resurging inflation since November amidst worries about price pressures and expansion in fiscal deficit. Before that it had reduced its discount rate by 150bps to 12.50 per cent since July 2009. The bank had embarked upon monetary easing in April 2009 as inflation came down after peaking to above 25 per cent in October the previous year.

Some economists insist the current bout of inflationary pressures is cost-push, spawned by increasing prices of fuel, food, raw materials, transportation, construction materials, elimination of energy subsidies, etc as indicated by the spike the wholesale price index (WPI) for the last month. The WPI rose 21.99 per cent in April from a year earlier. The WPI was up 1.84 per cent from March.

“With electricity tariff set to hike by six per cent from last month and little likelihood of the government passing on the reduction in global commodity prices, especially oil, to domestic consumers, the chances of prices coming down over the remaining two months of the fiscal year are slimmer,” says Sayem Ali, economist for the Standard Chartered Bank in Pakistan.

“With the government printing money for financing its budgetary deficit – the SBP has printed Rs171 billion since January onwards –, it is fair to assume that the headline inflation will breach the State Bank’s 12 per cent target by the end of this fiscal,” Sayem said.

The findings of a survey by the Pakistan Institute of Development Economist (PIDE) last week estimated the average CPI inflation to be above 14.50 per cent for the current financial year. Economists argue that it is imperative for the government to control its deficit financing needs in order to contain inflationary pressures in the economy. “It (the government’s borrowings from the central bank) does not look good,” Sayem said, adding internal factors had set off the current spurt of inflation.

The implications for the economy of high inflation over a longer period of time are quite obvious. It raises the credit price and stalls fresh investments in the economy, making a country’s exports uncompetitive in the international markets. At the same time, it also spawns deep uncertainty about future of the economy and affects consumer spending. “People living off fixed-income find their purchasing power and their quality of life declining,” says Asad. “Apart from that it results in job losses and increased incidence of poverty.”

Rising inflation in spite of a tight monetary stance being pursued by the central bank and implementation of an economic stabilisation programme has led to calls for easing monetary policy to push growth. “What we need right now is growth. But that cannot be achieved unless we bring down the cost of credit to encourage fresh investments in the economy for job creation and poverty reduction,” says Shahzad Azam Khan, a leading businessman from Lahore.

He is critical of the government’s economic policies that are “suffocating” the industry and making exports uncompetitive in the world. “We have been taking dictation from the International Monetary Fund (IMF) for far too long and pursuing unfriendly business policies under its pressure that are stifling our industry. Its time we shifted our focus to growth from stabilisation and cut the credit cost and reduce utility rates for encouraging investments and protecting jobs, industry and exports,” he added. “Unless you increase supply you cannot really hope to rein in cost-push inflation. We have tried it for the last three years and failed.”

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/is-it-costpush-inflation-750