Source: Express Tribune, August 16, 2010

Countering inflation by monitoring input prices

By Ali Wahab

 KARACHI: There is no place like home to spend Ramazan and Eid. While visiting Karachi in 2007 and driving through Mohammad Ali Society, my wife was excited to see a vendor selling sugarcane, commonly called gandairees.

Living in a country where such delicacies are not easily available, I asked the pushcart vendor to give me a kilogramme. After he weighed the same and offered me the gandairees in a plastic bag, I asked how much I owed for the purchase. “Sahab Rs40,” was his response.

I immediately took out a Rs50 note from my wallet and was about to complete the transaction when it dawned on me that I had purchased refined sugar earlier in the day at Rs35 a kg!

When I asked him why the gandairees were so expensive, he responded in a standardised manner: “Sahab, mehngai buhat ho gayee hai.”

I tried to reason with him on how gandairees could be dearer than the sugar that was produced using them as an input. Having probably not encountered this question before, the vendor resorted to the oppressed individual defence, meekly saying “Mayn ghareeb aadmi hoon!”

I, on the other hand, could not counter this one. After all, I was the one driving an air-conditioned car while he was earning his livelihood by pushing around a cart in Karachi’s oppressive summer. The nature of the transaction had completely changed: it became more of a charity rather than an impulse buy.

All through that vacation, I kept noticing the prices being charged by vendors, restaurants, snack bars and other small businesses. From a year earlier, 2006, I could notice a stark increase in prices. Ice cream available at Hussainabad’s food street was priced at Rs25 a cup from Rs15 a year earlier, an increase of 37.5 per cent.

I questioned whether milk prices had gone up by the same percentage? They most certainly had not. Milk rates had gone up that year by just under 12 per cent.

Another surprising thing was that such products were in high demand with a very visible queue at checkout counters in stores.

Noticing the prices of a commonly available brand of ice cream manufactured by a multinational, I realised that it had gone up by only 15 per cent. I wonder if ‘mehngai’ or inflation only affects cart vendors and small restaurants that pay virtually no taxes nor are faced with any regulatory requirements.

Measuring inflation

Looking at inflation and the way it is measured, the process leaves a lot to be desired. We can potentially have a better measurement system wherein a household’s disposable income can be used as a basis to categorise them into classes. For example, a person owning a home and not paying rent will have different expenses than a person giving a big part of his income as rent.

Similarly, people owning vehicles will be paying a higher part of their income as charges for fuel.

A person with three kids is more likely to incur education costs as one of his major expenses than a person who is retired. The point is that different households have different spending patterns.

One single basket to measure inflation is not right. Maybe a weighted inflation metric is something which the State Bank and Federal Bureau of Statistics should work together to develop. After all, unless we measure something properly we cannot monitor it effectively.

Successive governments have been receiving flak for their inability to control inflation. Everyone claims that everything costs more than it previously did. But has anyone advised on how effectively we can counter inflation. The State Bank has the monetary policy tools to counter inflation, but they are limited.

If the government increases the support price of wheat to aid the farmers, the trickle-down effect of the decision could be that flour, bread and other such commodities become expensive.

We should also realise that this can potentially lead to migration of crops. Those growing other crops may find it more rewarding to grow wheat resulting in high wheat production due to the incentive. Yet the prices of end products will not fall. This conundrum is also evident in the transportation sector.

Transport fares

Public transporters raise their fares as soon as fuel prices increase. On the other hand, the reduction in fares is not seen when fuel prices fall. If one analyses the movement of fuel prices during the last 24 months through the data available on Pakistan State Oil website, one can see that diesel (HSD) prices have gone up by 13 per cent from Rs64.64 a litre to Rs73.03. Have the fares of intra-city and inter-city buses gone up by the same percentage?

Petrol prices have actually gone down by about 20 per cent since July 2008. Do we see rickshaw and taxi fares going down? Unfortunately, the answer is no! When the government and public demand for a reduction in fares, transporters force out a situation for themselves by enforcing protests and strikes.

In these two examples, it is evident that the government’s ability to arrive at a win-win situation stands severely compromised.

Step by step analysis

My suggestion is that the government should thoroughly analyse the costs that are added at each step of the value chain. This may start with the most essential products and services.

Taking the example of transportation, can we quote any study from the government or any other source that tells us how much the cost per person per kilometre increases with a hike in fuel prices for a bus owner?

The government should install a commission that thoroughly analyses the incremental costs at various steps and then publicises the findings.

Fuel is a variable cost. As a rule of thumb, a change in input prices should result in increase or decrease in transport fares. What needs to be done is an analysis of all the fixed costs like the cost of a bus, salary of the driver and conductor, repair and maintenance costs, insurance costs (if any), interest charges on financed vehicles and then add the variable component like lubricants and fuel to come up with the minimum cost per person per kilometre that the public transporter incurs.

A possible result can be: “Government study finds the cost per person per kilometre on a bus is Rs0.60, on a mini-bus Rs0.75. Fares to be calculated on a per kilometre basis in future.”

The impact of a study like this would potentially be manifold. First, the public will be able to contest claims that a rise of Re1 per litre does not necessarily demand a rise of Re1 per passenger per trip.

Secondly, the government will be able to effectively negotiate with the transporters who may be demanding an exorbitant and unfair rise in tariffs. Thirdly, the transporters will be able to measure their efficiency against the standards developed from the study. Fourthly, economic and financial research will be aided through creation of benchmarks.

Research work on prices

This sort of study can be replicated for other essential goods and services as well. The commission that undertakes the research project can comprise experts from the Federal Bureau of Statistics, relevant industry representatives, the central bank, cost and management accountants and university professors. Non-governmental organisations can also come up with parallel or counter-studies.

Such studies can be revisited at regular intervals. After all, nothing should become stagnant else it will lose its effectiveness. It is in the absence of such studies and market information that profiteers take advantage and the proverbial common man suffers.

Published in The Express Tribune, August 16^th, 2010.

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