Trickledown effects of growth versus inflation

KARACHI- For the last five years the economy of Pakistan had been enjoying the trickle down effects of economic growth and development but over the last 8 months the consumers of Pakistan were facing pinches of inflation due to the inflationary effects of frequent price hikes.

With a persistent price increase in the basic food commodities, the poorest segment of the society in the country is getting failed in finding their chance of survival, undoubtedly dependent on earning even with least quality of bread and butter.      

It must be kept in view that past few years our economy benefited from the high and fairly robust GDP growth (7.0 percent on average); while for FY09 a growth of only 5.5 percent is being anticipated.

The current weakening fiscal framework is not a source of worrisome for general public but how to survive at Rs 6000 in a whole month is a great concern for them.  However, on account of sky-rocketing increase in the prices of services and goods resulting in a fall in the value of money, they are clear to think about the wages they are getting for as the wage increase must be in line with inflation.

Apart from food inflation, the consumers are also experiencing nonfood inflation mainly owing to an increase in the prices of items included in the transport& communication and fuel & lightning subgroups, reflecting the impact of price adjustment of key fuels and utilities (gas and electricity) by the government and their impact on transport fares.

The government does acknowledge that it has to take necessary measures for ensuring price stability and long term growth on sustainable basis expecting that some of the demand pressures would recede in the current fiscal year, if the supply side issues are not addressed, the gap could remain unchanged and the expected favourable impact on inflation will be diluted.

 Indeed, the restoration of macroeconomic stability is a primary task of the government but the issue is that how our non-skilled daily wagers or salaried people would benefit from the probable economic remedy in other words the trickle down impact of GDP growth could pass on to the consumer ?      

The consumer does want to get into the economic debate often raises by the economic intelligentsia and financial policy makers  that  is inflation is just a supply-demand-driven phenomenon or it is influenced by monetary mechanism. But the poor consumer wants to buy non-durable food goods at affordable prices.

It is claiming that the present PPP-led collation government has failed in achieving effective fiscal governance but as a matter of fact, whatever, government is in power, regardless its political orientation, the current risk facing and alarming economic scenario is a byproduct of 3-decades old poor politico-economic governance rather than fiscal authority.     

While announcing monetary policy for July-December 2008, the Governor State Bank had also warned government that inflationary pressures were alarming as on average basis, headline CPI inflation, at 12.0 percent in FY08, was 5.5 percentage points above the target for the year and underlying this non-food inflation more than doubled to 13.8 percent since December 2007.   In June 2008, the headline CPI inflation reached to a 30 year high of 21.5 percent YoY, while food inflation rose to record high of 32 percent.  Strong aggregate demand pressures combined with increased pass-through of the persistent rise in imported oil prices contributed to high domestic inflation.  On the domestic front, in addition to the demand pressures, a fall in the productive capacity of the economy is also contributing to rising inflation. This was due to an upward pressure on the prices of some key food staples such as wheat, vegetable ghee, rice and milk. Similarly non-food inflation (YoY) also accelerated and was recorded at 13.8 percent during the month under review compared to 5.1 percent in June 2007.

According to SBP analysis, the recent increases in the industrys cost of production are largely due to rise in other input costs.   Industry is paying more for oil and other imported raw material and capital goods in line with rising international prices and utilities and transportation costs and wage costs have risen due to the rise in minimum wages.    These elements constitute more substantial increase in production cost relative to financial costs.   Feeling the heat on their profit margins and expecting these global shocks to be permanent, firms have been passing on this imported inflation to their customers. The result is that the pressure on prices in the economy has remained persistent. An indication of these pressures is a sharp increase in core inflation measures.

The non-food non-energy indicator shows a YoY rise to 13.0 percent in June 2008, more than twice that in the last year.  Similarly, the 20 percent trim measure rose to 17.2 percent in June 2008 compared to 6.5 percent in June 2007.  

The danger now is that of a wage-price spiral, that is, to get compensated for the erosion in their purchasing power due to accelerating inflation, people will expect and demand higher wages, which will add to the burden of the production sector.  

The difference between the real domestic aggregate demand and supply of goods and services in the economy widened during FY08 and the rise in both the external current account deficit and the fiscal deficit are only a manifestation of this gap.  The growth in real domestic demand (7.1 percent) was stronger than in real supply (5.8 percent) and was mainly driven by a sharp rise in real consumption expenditures (both private and government) in the economy; the growth in real investment expenditures remained subdued (3.4 percent).