INFLATION CAUSES POVERTY

NUSRAT KHURSHEDI
(feedback@pgeconomist.com)

Dec 26, 2011 - Jan 1, 20
12

Inflation is a state in which the value of money falls and price level rises. Food inflation has negative impacts on human development in four ways i.e. by increasing poverty and inequality, worsening nutrition, reducing utilization of education and health services, and depletion of the productive assets of the poor.

Inflation brings no gain to common person except for few hoarders and investors. It makes few rich while impoverishing a large number. Prices of everything are increasing in Pakistan.

There is greater uncertainty about relative prices (the price of one good relative to that of another good). What effect will this added uncertainty have?

First, it will mean that it is more difficult for firms to plan since the added uncertainty makes it more difficult to predict the future. Second, it will change the relative advantages of liquid versus illiquid markets.

Inflation has lot of negative impacts on the economy of Pakistan. It discourages productive activities like saving and investment. Further, it reduces the competitiveness of the country in international trade. Inflation erodes purchasing power, slows down growth, increases the burden of indirect taxes on the common person and affects the quality of life. Increase in inflation necessitates the central bank to increase interest rate where businesses borrow at higher cost. This cost passes on to consumers, which increases consumer price index.

The 2010-11 was the most eventful year. The inflation poses serious threat to macroeconomic stability around the world. More worrying thing is that the spike in inflation is coming more from food inflation, which is detrimental for poverty situation. According to a study by Asian Development Bank (ADB), a 10 percent rise in food inflation is likely to deteriorate poverty situation by 2.7 percentage points.

The issue of inflation takes primary importance in Pakistan as the rising inflation has far-reaching economic and social implications. There are various factors, which increase the inflation in Pakistan.

The rate of inflation is also a result of shortage of certain food items and increase of prices of oil in the world market.

The increasing trade deficit is also perceived to be major cause of increase in inflation.

The change in exchange rate also has influence on targeting inflation. Rising import prices is also perceived to be another factor of surging inflation.

Due to expansionary facial policy, the domestic demand puts pressure on current account deficit. This deficit increases inflationary pressure in the economy. Government continuous borrowing from the state bank of Pakistan is also leading to inflation.

Fiscal policy is also a significant factor in inflation. Indirect duty, like sales and excise taxes duty, lifts up the value of customer supplies and generates inflation stress.

Side by side, mismanagement and lack of government control over markets may also be considered an important factor of high inflation in Pakistan. This specifically can be observed in case of food items.

The government has not taken the strict actions against hoardings of sugar, wheat, cooking oil and other necessary kitchen.

However, the high food inflation is having a significant impact on the consumers in general and the middle class in particular. In Pakistan, the prices of regular items, such as flour, sugar, ghee, dairy products and other items are rising consistently. Sometimes, even the onion and potato get out of reach of the common person. The sky-high prices of vegetables and other food items have put unprecedented strains on the common persons, and families are struggling to cope with this shock and have already begun to reduce consumption of vegetables.

Soaring food inflation is making the lives of millions of working class, poor and other common persons even more miserable.

It has become nearly impossible for the common person to support his/her family. Most of them regularly complain of high cost of buying food and some even said it has become extremely difficult for them to meet the food, education and healthcare needs of their children. Prices of more than 100 essential items increased during 2010 -2011, in some cases by 128 per cent.

Inflation are persevering to increase the ratio of poverty with the considerable increase in prices of wheat and other daily commodities by 16 percent between June and December, leading to an increase of 1.9 percent in poverty indicated in food price index. It is heart-rending that there is no proper price control mechanism.

The prices of sugar, oil and flour are different at different shops. But, the most disturbing fact is that no action is taken by the government to eliminate this practice.

If inflation remains high, household budget of a common person is not the only thing that will be affected. In the end, it is going to adversely affect the common person's savings, which are largely dependent on fixed income instruments.

It looks like investors might have to settle for negative returns, considering that inflation rates have been consistently higher than fund rates, small saving rates and bank deposit rates.

Different national saving organisation does not provide even a single product for widows and pensioners that can absorb the impact of inflation on their savings, what to talk about others.

Unfortunately, ill planned government policies mostly create unemployment. Fixed income groups - salaried class, pensioners etc. - have not been granted any relief in the form of salary adjustments. The government policies regarding energy and water reservoirs are not well defined and clear.

Due to this reason, electricity load shading, gas load shading and water shortage for agricultural purposes are causing inflation.

The effect of inflation severity is both social and economic due to the erosion of the real value of money. When food prices rise families with lower incomes feel the pinch more acutely since food expenditures make up a larger share of their total expenditures.

Inflation mostly hits the poor and augments their hunger because of foodlessness or less nutritious food. They become less likely to be productive and earn a living and more vulnerable to illness.

The price hike of edible affects people at varying income levels differently, and puts upward pressure on the cost of living and thus lowers down the overall standard of living. Shopkeepers report that people who bought the vital commodity in bulk earlier are now compelled to purchase only meagre quantity.

Unscrupulous shopkeepers have taken advantage of the situation by raising prices. They haven't any other choice to meet their own inflated cost of living. Millions of people are pushed further into hunger as food becomes unaffordable.

Inflation also leads to housing rent burden, clothing problems, and food scarcity.

Being a vulnerable class in the society, poor are grinded because of no safety nets.

They are normally asset-poor, while most of their saving is in the form of cash.

The government, as always, is confused and does not know where to look for a solution to its plethora of economic troubles.

ADB in its report has warned that the continued rise in prices is bound to drag many below the poverty line. The situation demands that policymakers formulate an effective strategy to push growth and contain inflation simultaneously.

The government must follow the economic and financial reforms agenda to improve its fiscal position and put in place a mechanism to prevent the artificial increase in food prices.

A PPP senior member once said in a TV talk that a person earning Rs5,000 to Rs7,000 is not poor. Nobody asked the official to make a monthly budget for a family of even two persons within such paltry income.

For such hedonistic government officials, the UN definition of poverty that a person who earns less than one US dollar is poor has no significance.

They perhaps do not know that poverty is a condition in which a person, either because of inadequate income or unwise expenditures, does not maintain a scale of living high enough to provide for his physical and mental efficiency and enable him and his natural dependents to function usefully according to the standards of society of which he is a member.

Although common person fights this never stopping price rise, our politicians are finding ways to cope with the same issues in AC and other luxuries.

The government is busy solving internal conflicts by supporting other party. And, the question that arises here is who is thinking about the problems faced by common person.

The government is more interested in power politics than in solving public financial problems. It is a high time for government to douse the anger of the common person and for this the government should adopt the fire fighting approach.

Strategic planning is required to control over inflation. Instead of import, home production and import substitutions should be encouraged.

Preference should be given to consumer goods. Financial support should be given to agriculture sector and import substitutions. The government must pay attention to foreign direct investment, which ensures the foreign exchange inflow in our economy. The price control committees, mostly comprising of big traders, seem helpless to control the prices. They should be strengthened.