There may be legitimate worries on current account, fiscal account, exchange rates, structural reforms and all that, but the single largest challenge the government faces today that concerns the masses, is that of inflation. The commodity price spiral surely has not helped, coupled with failed attempts to try and “control” prices. The CPI inched up to 9 percent for September 2021. The Wholesale Price Index (WPI) on the other hand clocked 20 percent year-on-year rise again – for only the second time ever.
That is where the CPI for at least 2QFY22 may well be facing an upside risk. The WPI is loosely a leading indicator for retail prices, and the CPI movement, barring few exceptions, confirms the trend for well over a decade. The previous round of WPI in the high teens had culminated to CPI seeing multiyear highs of 14.6 percent in January 2020 – after a considerable lag. The momentum of the current rally has been building for five to six months – and double-digit CPI inflation may not be too far away.
Wholesale prices eventually feed into retail, and while there may be cases of margins eroding, the persistent increase in WPI of the transportable items’ subgroup indicates, there will be little respite. All items still need to be distributed, and the WPI increase has not been restricted to just the fuel cost alone, where one would have thought of a brief period of margin curtailment. The increase is across the board, from farm produce to raw materials.
The textile subgroup registered its highest year-on-year increase at a staggering 27 percent, keeping with the trend that started in March 2021. Textile WPI since March 2021 has averaged 21 percent year-on-year, well over the previous 5-year average of 5 percent. Needless to say, this will find a way to retail prices sooner rather than later. Textile prices at retail level have not gone wild yet, but it will be very surprising if the same does not start reflecting soon.
LNG forms a major component of the electricity and gas subgroup, and the increase this winter would be significantly more than the previous one. Even without an increase in electricity base tariff (should Pakistan refuse the IMF), the energy cost is only going to go higher. Petroleum prices have been tested at new highs, and even if oil prices recede from current levels, the government is likely to make up for the lost revenue during 1QFY22. There is little respite in offing at wholesale level. The CPI is not completely insulated.