Zafar Iqbal
The Pakistan Bureau of Statistics (PBS), a key source of economic data, has recently released its estimates for the Consumer Price Index (CPI) for May 2024. These figures, which reveal a significant shift from the previous month, are crucial for understanding the current economic climate. According to the report, the CPI stood at 11.8 per cent in May, a noteworthy decrease from the 17.3 per cent recorded in April. This drop was primarily attributed to a decline in the prices of housing, water, electricity, gas, and fuels, which collectively hold a substantial weight in the index. The decrease in housing prices, for instance, was due to a temporary oversupply in the market, while the decline in fuel prices was a result of international market dynamics.
However, a critical analysis of the CPI data unveils several underlying factors that deserve close attention. Firstly, the PBS allocates a weightage of 19.2 per cent to rent within the overall CPI calculation. Despite this substantial weight, the indices for rent remained static in May compared to April, raising concerns about the transparency and accuracy of the data, especially regarding the specific localities and properties included in the calculation. The static rent indices could potentially lead to an understatement of the CPI, as they do not reflect the actual changes in rental prices, thereby affecting the overall accuracy of the CPI data.
Secondly, the significant weightage given to electricity charges (4.5 per cent) in the CPI calculation raises questions about the methodology employed by PBS. The data indicates that PBS bases its calculations on the lowest electricity rates applicable to consumers using less than 200 units per month rather than using an average of prevailing rates, which would better reflect the true rate of inflation in this sector. This methodology, known as the ‘lower of the two rates’ approach, is used to prevent overestimation of inflation due to the inclusion of higher rates that may not be representative of the majority of consumers.
Furthermore, the report highlights the impact of external factors, such as international fuel prices and government policies, on the domestic CPI. Notably, the recent decrease in petrol and high-speed diesel prices in Pakistan was attributed to international oil market dynamics rather than any domestic policies. These reductions, while beneficial in reducing transportation costs for food and non-alcoholic beverages, remain contingent on volatile global oil markets. This demonstrates the vulnerability of the domestic CPI to international economic conditions, underscoring the need for a more nuanced approach to inflation management.
Moreover, the potential understatement of the CPI, estimated at 4 to 5 percent in May, adds to the 2.5 to 3 percent understatement observed in April. These discrepancies, if not addressed, could lead to a misinterpretation of the inflationary pressures faced by Pakistani consumers. This underscores the need for a more comprehensive and transparent methodology in CPI calculations to ensure accurate data representation and guide effective policymaking. The consequences of misinterpretation could be significant, potentially leading to economic instability and civil unrest.
The overall decline in the CPI from July 2022 to May 2023 to the same period in 2023-24 may offer some relief, but the consistent presence of double-digit inflation rates warrants serious attention from stakeholders, as it has the potential to trigger civil unrest and economic instability. The high inflation rates could lead to a decrease in purchasing power, increased production costs, and a slowdown in economic growth, posing significant challenges for the Pakistani economy.
In light of these findings, questions arise regarding the synchronization of the State Bank of Pakistan’s (SBP) decision-making with the actual inflationary trends. The high discount rate of 22 percent alongside declining core inflation rates presents a perplexing scenario. While the high discount rate is aimed at curbing inflation, the declining core inflation rates could indicate a slowdown in economic activity. It is crucial to ensure that policymaking and data reporting align with the economic realities on the ground, as any discrepancies could erode trust and confidence in the economic landscape.
In conclusion, the analysis of the CPI data for May 2024 reveals a complex interplay of domestic and international factors impacting inflation. Moving forward, your input and support in advocating for a transparent and comprehensive approach to data collection and reporting will be essential. This will provide an accurate representation of the economic realities and guide informed policymaking, ensuring the stability and growth of the Pakistani economy.
