The challenge of inflation

Inflation has continued to plague the economy for several years now, significantly eroding household purchasing power and pushing millions of citizens towards poverty. The emotional and physical trauma of rising prices is unimaginable, and its broad impact has been a key reason in eroding the popularity of Imran Khan’s government. This is one reason why the prime minister has asked Pakistani corporations to “raise their employees salaries.” The most recent data released by the government does not signal a near-term end to the pain, and with Russia knocking at Ukraine’s borders, exogenous factors may further complicate the situation for Khan’s government.

According to January 2022 data, inflation measured by the consumer price index increased by 13 percent on a year-on-year basis. CPI comes in at a red-hot 13 percent. Urban food prices increased by 13.3 percent while rural food prices were up by 11.8 percent. The Sensitive Price Index, which measures inflation in a narrower basket, showed an alarming increase of 20.9 percent and the Wholesale Price Index, which one could argue is a forward indicator of consumer prices, registered an increase of 24 percent.

It is for this reason that Prime Minister Khan “rejected” a summary to increase petroleum prices by 11 rupees per liter – this decision has been taken, according to the government’s spokesmen and supporters, to provide “relief” to the masses. Both the economic and political logic of this decision is flawed: on the economic front, keeping prices stable in the near-term will only increase medium- and long-term inflationary pressures, especially if tensions in Europe and the Gulf do not ease any time soon. If global oil prices remain stubbornly high, the government will have to both dramatically increase prices in the near-term and force the State Bank of Pakistan to allow a sharper depreciation of the rupee, which would lead to second- and third-order inflationary effects in the economy. This then would mean that the political benefits of near-term “relief” to the masses would be swept away by citizen anger over sky-high inflation in the run-up to elections.

The smarter political choice then would have been to allow domestic prices to reflect reality, make the argument that the government has no choice on this matter given that the country is an importer of energy, and make the relief argument by expanding the Ehsaas cash transfer umbrella to provide relief to the most marginalized citizens of the country. Such a strategy would also leave the door open for the government to sharply cut petroleum prices should exogenous factors turn in the favor of the government, meaning that the Russians ease up on Ukraine and the Iranians stop their belligerent actions.

Then there is the issue of food inflation, which continues to be high on a year-on-year basis but is showing some signs of calm; however, month-on-month food inflation, which declined by 0.45 percent in January 2022, may spike up once again in the coming weeks. This is mainly due to the fact that wheat output may be missed, with farmers in Khyber Pakhtunkhwa pointing out that a fertilizer shortage may impact the province’s wheat production by up to 40 percent. This miss in expected output, coupled with a dramatic humanitarian crisis in Afghanistan, could lead to an adverse impact on wheat prices in Pakistan. A shortage of wheat would then mean that Pakistan needs to import to meet local demand at a time when the crisis in Ukraine is pushing international wheat prices to near-record levels.

What all of this means is that there is a strong likelihood that Pakistani citizens are likely to face a lot more economic pain before things get better. And with elections around the corner, Imran Khan’s government will face increasing criticism for sky-high inflation. Based on the government’s past narratives, it is likely that spokesmen will come up with all sorts of novel arguments to defend the government. However, a citizenry that has faced rising inflation for months on end is unlikely to be in a forgiving mood.

It is for this reason that Khan’s advisors ought to provide a more comprehensive strategy to the prime minister. This strategy must go beyond near-term gimmicks, such as the provision of “relief” to the masses through the prime minister’s interventions on petroleum prices. Such actions, as argued above, will only lead to more pain at a time when the ruling party needs to avoid such criticisms.

As elections draw near, perhaps the best course of action for the prime minister and his team is to pray that Russia backs off Ukraine, that the Iranians go easy on the Gulf, and that the global economy slows down. The combination of these factors is likely to lead to a sharp decline in international commodity prices including oil and provide much-needed relief to the prime minister and his party.