Measuring inflation accurately is vital to policymakers. The SBP designs monetary policy in accordance with the expected inflation rates. When banks lend money, lending rates are adjusted with inflation rates, T-bills’ (treasury bills issued by the SBP in Pakistan) rates move with inflation rates. Consumer Price Index (CPI) provides timely information about inflation. In some cases, the CPI data is used to index wages in Pakistan. In the west, CPI is also used not only to index wages but index pensions and social security benefits, also CPI data helps government to adjust government fees and charges, the adjustment of payments in commercial contracts, and for formulating and assessing trade and exchange rate policies.

In the developed world, CPI is measured on monthly basis except Australia where data is released on quarterly basis. The base year and weights are revised after every five-year in most cases. Number of items varies from country to country depending upon the tastes and preferences of households and standards of living. Interestingly, in the UK the private sector company collects data on domestic prices.

Despite being one of the most ‘misunderstood’ terms in economics, inflation is one of the most talked about subject. However, the importance of understanding what inflation is, and the causes and effects and methodology to measure inflation are to some extent controversial topics.

Most widely used and quoted index is the CPI. CPI covers retail prices of 375 items in 35 major cities and show the cost of living in urban area of Pakistan. The Wholesale Price Index (WPI) is used to calculate price changes of a basket of 425 items at wholesale level prevailing in the cities of origin of the commodities.

Like other countries, inflation in Pakistan is also measured based on the basis of the CPI. Inflation has been a crucial macroeconomic problem for most countries of the world and Pakistan is no exception. Inflation is generally defined as a sustained increase in the general price level. However, measuring inflations has been a controversial topic in Pakistan. Inflation can be measured on the basis of point-to-point or average changes. The changes can be over a week, over the financial year or a year-on-year basis. To measure inflation, a number of goods and services that are representative of the economy are put together into what is referred to as the "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that same basket in the base year.

There are problems associated with measuring inflation through the CPI. First, the CPI is based only on a small fraction of the many goods and services that are available in an economy. In case of Pakistan, 375 items included in the basket as compared 650 in Canada, 741 in Singapore, 596 in Japan, and 650 in the UK. If a person’s buying habits differ substantially from the market basket on which the index is based, that person may experience a very different change in his cost of living than what the CPI shows. The weights of basket of CPI are derived from Family Budget Survey, which, in most cases, are revised after every 5-year period. In Pakistan, however, weights are revised after every 10-year period.

Grocery budget, for many households, go out of hand once food inflation surfaces. The first half of FY-07 saw 8.4 per cent (average) inflation because of persistent rise in food prices. Food inflation ran into double digit for the first half of FY-07 for consecutive five months. December 06 month proved to be a deadliest month for food inflation when it reached to 20 months’ high 12.7 per cent. The main reason for high food inflation, as cited in the monitor, was supply shock.

It is to be noted that 60 per cent of the items included in SPI belonged to food group. About 50 per cent of total items in the SPI basket recorded double-digit. Figure below shows rising food inflation trend for every December month since 2002. The Sensitive Price Indicator (SPI), which contains more than 60 per cent of the food items, increased to 12 per cent (YoY) in December 2006. About 50 per cent of the total items in the SPI basket recorded double-digit inflation.

The data in Table-I, performance during 2003-05 was not discouraging, except that tomato production remained unchanged, however, its per hectare yield and acreage index went down. Did stockiest again played their game? However, onion production rose by 21 per cent during 2003-05. If onions were stocked, it could be expected that shortage of onion should not have occurred during 2005-06.

Table II compares food and population growth rates of Pakistan. The data clearly points to a situation where food supply remained under constant pressure, particularly during 1995-97 and 2001-03.

With growing population, the demand for food will continue to grow. Supply must exceed demand to contain prices. The use of latest technology in the agriculture sector has not been encouraging in Pakistan. Farmers should learn how to use latest technology and build their knowledge around it to improve per hectare yield. This can be done through education and training and easy access to bank credits.

Hoarding is another issue, which has contributed to rising inflation. The sugar crisis speaks high about the failure of government machinery. Cartels in Pakistan are easily formed to manipulate the market - cement, wheat, sugar, even in some cases, milk and mutton/beef and chicken markets behaved like a monopoly and artificial shortage was created in the market to raise prices. It seems that hoarding is one of the important determinants of rising food inflation. Thus the responsibility lies with the government to break the cartel and provide relief to the poor consumers. However, it is believed that, in some cases influential people having closed links with the rulers are mill owners-hence punishing the culprits has remained a dream so far.

TABLE I: FOOD SUPPLY STATISTICS OF PAKISTAN

2003-04 2004-05 Change %

Quantum index, food crops, (1999-00=100) 94.9 106.1 (P) 6.1 (99-00)

Acreage index, food crops (1999-00=100) 99.5 99.9 -0.01 (99-00)

All pulses production (000 tones) 870.8 1094.2 20

Onion production (000 tones) 1449 1764.9 21.80

Yield per hectare, onion (tones) 13.3 13.8 3.75

Tomato production (000 tones) 426.2 426.2 0

Tomato yield per hectare (tones) 10.6 10.3 -2.83

Wheat production (000 tones) 19499.8 21612.3 10.8

Yield per hectare (kg) 2373 2586 9

Estimated overall milk production (000 tones) 35603 36620 2.8

Estimated overall meat production (000 tones) 2185 2238 2.36