A gradual change is expected soon in the spending habits of consumers in Pakistan – especially on essential goods and services – as data provided by the Pakistan Bureau of Statistics on Monday shows that the Consumer Price Index for August slipped to 9.6 percent.
This drop to a single-digit reading for the first time in 34 months is likely to provide a much-needed breathing space to the people, especially to those struggling for years to make both ends meet. However, its impact in urban areas might be different from that in rural areas. Since the cities have slightly higher inflation, urban consumers might feel more immediate benefits.
On the other hand, many households, especially in the rural areas, might remain cautious despite the reduction. They are likely to focus on saving or managing their expenses mainly because of the lingering effects of previous inflationary periods. We might also see a gradual increase in consumer confidence if the inflation rate continues to decline, which would give more purchasing power to consumers and businesses.
This trend might lead to higher spending, which would result in increased economic activity. However, if consumers perceive the drop as temporary, their spending habits might remain conservative and they would focus only on basic necessities. But if prices rise at a slower pace, it would allow households and firms to further stretch their income and budgets, hence stabilizing consumption, which is an important factor for economic growth in a consumption-driven economy.
In addition to that, the State Bank of Pakistan might consider bringing the policy rate down just a notch. This would make borrowing relatively cheaper and might encourage businesses to invest in expansion and consumers to take out personal loans for homes, cars or other purchases. This spending by businesses and the general consumers would subsequently stimulate economic growth. However, the central bank would thoroughly consider other factors as well before making such a move, because decreasing the interest rate prematurely might trigger excessive borrowing not only by consumers and businesses but also by the government, which would consequently retrigger inflation.
This decrease has largely been attributed to the current government’s economic policies and reforms. In a statement, Prime Minister Shehbaz Sharif expressed satisfaction over the single-digit inflation rate. He said this achievement was a proof of the government’s commitment to ease the financial burden on citizens. He said the country was on the verge of bankruptcy, but the situation was avoided through the government’s prudent economic policies. He added that now the country had been set on a path to stability and growth. He also reiterated that the sufferings of the people would be mitigated.
On the other hand, Federal Minister for Information and Broadcasting Attaullah Tarar told the National Assembly that the decrease in inflation proved the government’s narrative of effective economic management.
However, it needs to be taken into account that the reduction is modest. A deep analysis of the bureau’s data shows that most consumers continue to face inflationary pressures, especially in the food and non-food categories.
In the food group, onions saw the sharpest increase, with prices rising by 22.84 percent on a month-on-month (MoM) basis and 136.32 percent on a year-on-year (YoY) basis. Similarly, chicken prices increased by 13.62 percent (MoM) and 19.04 percent (YoY), while eggs went up by 12.39 percent (MoM) but decreased by 1.86 percent (YoY).
In addition to that, prices of fresh vegetables rose by 12.25 percent (MoM) and 76.35 percent (YoY). Besan and pulse gram prices also increased by 4.88 percent and 4.55 percent (MoM), respectively, and 31.15 percent and 42.35 percent (YoY). In contrast, fresh fruits decreased by 13.10 percent (MoM) but increased by 27.32 percent (YoY), while prices of tomatoes fell by 8.09 percent (MoM) and rising by 16.27 percent (YoY).
Among non-food items, motor vehicle tax saw a dramatic increase of 168.79 percent (MoM), maintaining the same rate (YoY). Electricity charges decreased by 6.45 percent (MoM), while gas charges surged by 318.74 percent (YoY). Stationery prices also went up by 5.08 percent (MoM), while dental services saw a 28.84 percent (YoY) increase. Prices of woolen readymade garments increased by 23.31 percent (YoY), while those of cotton cloth by went up by 1.24 percent (MoM) and 24.17 percent (YoY).