CHI Since the beginning of 2008, the middle-income groups in Pakistan have been facing heavy inflationary shocks mainly because of their changing consumption pattern and reduction in the purchasing capacity of such households.
The State Bank of Pakistan, while quoting a study in its recent annual report, states that the middle-income groups face average CPI inflation most of the time, which is evident from the fact that CPI inflation, including both food and non-food inflation, for the middle income people, who are earning from Rs 5,000 to Rs 12,000, was recorded at 11.9 per cent during the financial year 2009-10 from 21.6 per cent in 2008-09. Contrary to that, it said that since contribution of food inflation had been dominant during recent years, the incidence of inflation fell disproportionately on low-income groups.
It also implies that high and middle-income groups experience relatively low and stable inflation.
This situation suggests that targeted subsidy programmes for the provision of key staples at low prices through Utility Stores Corporation should be introduced for the low-income groups. This can be done with the help of NADRA and it would help improve the national database of CNIC holders, the report added.
According to the report, food inflation due to increased food commodity prices is generally higher in Pakistan than non-food inflation. In recent years, it has been observed that food inflation remained higher than non-food inflation, irrespective of the levels of inflation.
Year-on-year (YoY) inflation on monthly basis from July 2002 to June 2010 reveals that out of 96 observations, CPI inflation for low-income group was higher than the overall CPI inflation for 67 times (about 70 per cent). Inflation for low-income group dropped below overall inflation only for 29 months during the sample period. It implies that low-income group faced disproportionately higher inflation during the most of this period, the report mentioned.
The high inflation is harmful for low-income groups than high-income group. It is a fact that inflationary pressures were mostly ignited from food inflation in Pakistan. Since low-income groups spend most of their income on food commodities, they are more vulnerable to high inflation, the report observed.
The report further said a comparison of consumer price inflation for low-income and high-income groups reveals that out of sample period of 96-months, low-income groups faced higher inflation for 70 months. More importantly, low-income groups were relatively better off when inflation was low and declining.
For example, inflation was lower for low-income groups than high-income group (for 11 months in a row) when inflation declined from 3.3 per cent in October 2002 to 2.2 per cent in September 2003. Similar episode was repeated for another 11 months when inflation fell from 9.7 per cent in May 2005 to 6.2 per cent in April 2006. This was not a coincidence. It shows when inflation is low and falling, it is advantageous for the low-income groups.
In simple words, disinflationary process at low levels is more beneficial for the low-income groups than the disinflationary process at high inflation rates as observed during FY 2010, report concluded.