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mtgondal · #50 Thursday, May 31, 2007

Alarming rise in food inflation

EDITORIAL (May 31 2007): The SBP inflation monitor for April, 2007, released the other day, has recorded 9.4 percent food inflation, as against 3.6 percent in April last year, representing an alarming almost three-fold rise in food prices.

Of the total 124 commodities included in the food group, the prices of 47 items such as eggs, some fruits, cooking oil, different types of rice, chicken and some vegetables registered an increase, ranging from 10 to 100 percent. However, the non-food inflation declined to 5.2 percent during the month from 8 percent in April last year.

According to the SBP monitor, the general CPI inflation rose to 6.9 percent in April 2007 on year-on-year (YoY) basis from 6.2 percent, as registered in the corresponding month of the last year. The higher CPI inflation is due to strong food inflation that has muted the impact of declining non-food inflation, says the SBP report.

The bottom line is that the declining trend in non-food inflation this year has been offset by a galloping rise in food inflation, with the result that CPI inflation has remained at a higher level than the FY2007 target. The worst hit segment is 74 percent of the population, which lives on two dollars a day. The purchasing power of the low-income groups has been further curtailed by the food price inflation.

Meanwhile, speculators and hoarders, ever vigilant to exploit the negative market trends, have been creating artificial shortages to cash in on the self-created crisis by pushing up prices of kitchen items. By the way, food inflation is probably considered the worst form of inflation as it unsparingly targets the poorest and most vulnerable sections of society by eroding their household budgets.

Viewed in the overall perspective, inflation can have a number of adverse consequences for the economy. First, it erodes the purchasing power of the population and hence leads to a contraction in economic growth. Linked to it is the increase in macroeconomic instability as an inflationary environment generates many uncertainties. Secondly, inflation has a regressive impact on the poverty profile of a country.

Frequent increases in overall prices hurt the poor more as the size of their consumption basket is significantly reduced due to every inflationary bout. Thirdly, inflation can damage a country's competitiveness by leading to an appreciation of the local currency, and a consequent overvalued exchange rate, which will have a negative effect on exports. According to available data, Pakistan's annual average inflation rate (using the GDP indicator) from 1980 to 1993 was 7.4 percent.

However, the acceleration in inflation in the mid-1990s reversed this trend. With the overseas sale of manufactured goods falling, the government seems to be focusing on export of foodgrains at the cost of the poor. Incidentally, the recent ECC decision to suspend wheat export was taken only after firm representations were made by Sindh government and the flourmill owners over a spurt in wheat and flour prices in the local market.

A distribution of price change meanwhile suggests that 15 out of 43 food items witnessed a rise of over 10 percent in inflation during the month under review. While six items recorded moderate inflation of five to 10 percent, other 11 items demonstrated subdued inflation of up to five percent. According to one analyst, the combined weight of commodities with double-digit inflation was about 42 percent of the food group. There is a widely held perception that after securing reasonable quantum of exportable surpluses in agriculture, the government is contemplating earning additional foreign exchange, wheat export ban or no ban.

We believe that the problem in fact lies with a distorted supply chain, and not with the inadequate or insufficient availability of essential food items in the market. Price manipulation through hoarding and use of other illegal practices is mainly to blame for the high inflationary trends in the country. Not only is the government required to help people with surplus money to find productive avenues for their capital rather than create artificial shortages through hoarding and black-marketing, it should address the problem of supply chain distortions. Only then can it help solve the problem on a permanent basis.