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  • Topic: Inflation, Consumer price index, 2007–2008 world food price crisis
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  • Published : January 1, 2013
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Chapter 7

Inflation
The global economy experienced significant financial crises in 2007-08. The financial crisis emanated in subprime mortgage loan portfolio and shocked the confidence of the international institutions and markets which in turn badly deteriorated the economic development and balance of payments across the world. In the developing countries, the crisis was seen at the time when they were already experiencing severe terms of trade and slower economic growth. The financial meltdown led to a backlash on consumer Fig-7.1: Inflationary Trend

25.0 Old Base 2000‐01=100 New Base 2007‐08=100

markets and broadly on the process of investment in the production of goods and services. This coupled with spike in commodity and oil prices led to a decline in the aggregate demand and raised inflation the world over. In Pakistan the affect was felt much severely as the country was also experiencing internal security issues and compaign against terrorism. The surge in food and commodity prices witnessed during 2008-09 pushed the consumer prices index (CPI) to a record level of 25.3 percent in August 2008.

CPI
20.0

15.0

10.0

5.0

0.0 Jan-09 Jan-10 Jan-11 Nov-08 Nov-09 Nov-10 May-09 May-10 May-11 Nov-11 Sep-08 Sep-09 Sep-10 Mar-09 Mar-10 Mar-11 Sep-11 Jan-12 Jul-08 Jul-09 Jul-10 Jul-11 Mar-12

The rising trend in domestic prices in tandem with global food and fuel prices affect several macroeconomic dynamics - consumption, investment, inflation, trade and fiscal balances and ultimately resulted in slow down of GDP growth. Asian Development Bank (ADB) report of 19th March, 2012 titled “Food Price Escalation in South Asia” noted that the region suffers from a higher

overall food inflation rate than the rest of developing Asia. The report further pointed out that the region, with a large number of people already living close to the poverty line, is one of the most vulnerable regions in the world to food price shocks. The World Bank has also rated high food prices as the biggest challenge facing most developing countries. This rising trend in inflation is not specific to Pakistan. Regional inflation is 99

Pakistan Economic Survey 2011-12 estimated to have also risen in India, Bangladesh and Thailand (Table 7.1). Sri Lanka CPI Food 7.4 9.3 7.0 8.2 6.4 6.6 5.1 3.8 4.7 2.1 4.9 2.5 3.8 -0.2 2.7 -4.1 5.5 -2.5 6.1 0.2

Table: 7.1 Regional Countries Food Price Inflation Pakistan India Bangladesh Thailand CPI Food CPI Food CPI Food CPI Food Jul-11 12.4 17.1 8.4 8.2 11.0 13.4 4.1 7.2 Aug-11 11.6 13.2 9.0 9.6 11.3 12.7 4.2 8.4 Sep-11 10.5 9.9 10.1 9.6 12.0 13.8 4.1 8.9 Oct-11 11.0 11.7 9.4 10.2 11.6 10.9 4.2 9.9 Nov-11 10.2 10.0 9.3 8.5 11.6 12.5 4.1 10.2 Dec-11 9.7 9.5 6.5 0.7 10.6 10.4 3.6 9.1 Jan-12 10.1 9.2 5.3 -0.5 11.6 10.9 3.4 7.7 Feb-12 11.0 10.5 8.8 6.1 10.4 8.9 3.4 7.2 Mar-12 10.8 9.8 9.5 9.9 10.1 8.3 3.4 7.1 Apr-12 11.3 10.7 9.9 8.1 2.7 4.9 Source: PBS, BBS, Ministry of Commerce & Industry India, Bank of Thailand.

Food insecurity is a multi dimensional problem and deserves to be tackled through a multi pronged strategic approach where demand, supply and distribution factors need to be taken into account. Availability and access, two important components of food security needs to be addressed simultaneously. Food carries the largest weight in three price indices and hence influences the movement of these indices even with slight variation in prices. The most visible impact of rising food prices on the economy is acceleration of inflationary pressure. In such a situation controlling the inflation becomes unmanageable. Pakistan is experiencing double-digit inflation over the last several years mainly due to increase in prices of food. Inflation is generally measured by the Consumer Price Index (CPI). The other measures of inflation used in Pakistan are the Wholesale Price Index (WPI) and Sensitive Price Indicator (SPI). The Pakistan Bureau of Statistics (PBS) has changed the base year of the price...
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