Real fear of stagflation emerges as inflation hits high

Real fear of stagflation emerges as inflation hits high


The spectre of rampant inflation has loomed ever since the government decided to devalue the rupee. The subsequent increase in Pakistan’s import bill, especially for oil, increased transport costs for domestic products and that increase was always likely to be passed on to the consumer.

The Consumer Price Index (CPI) based inflation increased by 7.19%  on a year-on-year basis in January 2019 as compared to the same period last year, Pakistan Bureau of Statistics said on Saturday.

After small falls in the rate of inflation in the last two months due to declines in the prices of fresh fruits and vegetables, in January annual inflation reached 7.19% – the highest it’s been in the last four years. On a month-by-month basis, inflation for January was 1%. This has far exceeded government estimates of 6% annual inflation and the problem is likely to become even worse.

On a month-on-month basis, the CPI increased by 1% in January 2019 against December 2018. The average inflation rate during July-January (2018-19) stood at 6.21% over the same period last year.

The PBS collects retail and wholesale prices and computes the CPI), Wholesale Price Index (WPI) on monthly basis and Sensitive Price Indicator (SPI) on weekly basis. In January, 2019 the CPI increased by 1%, WPI decreased by 0.21% while SPI increased by 0.41% respectively.

So far, the response to inflation from the State Bank of Pakistan has been to increase the interest rate to 10.25 percent, making it the highest rate in seven years. The hope is that increased saving will reduce inflation. But the trade-off is that credit will become more expensive for the private sector and could hurt growth.

In pursuing its economic agenda, the PTI government has put the needs of the public well below that of business interests and international lending institutions. Increases in the price of gas and electricity end up hitting the poor the hardest, while everyday items like food become more expensive thanks to devaluation.

The recent mini-budget seemed designed to spur a temporary increase in the stock market but the core interests of the people were ignored. Austerity policies have hit development budgets the hardest even as little is done to decrease the budget deficit because of the goodies handed out to the rich in the form of reductions in capital gains taxes and withholding taxes on bank transactions. The inflationary monster consumes the poor before anyone else but their needs seem to have taken a backseat to the wants of the rich.

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