THAT rising global commodity prices are feeding domestic headline inflation is not unusual for an economy like Pakistan that is heavily reliant on imported energy, food, industrial raw materials, capital goods, etc. What is odd is the fact that the government believes that imported inflation is feeding into only urban prices and the situation in the rural areas has been relatively better. It is true that the urban and rural markets in Pakistan largely remained ‘segregated’ until a couple of decades back, resulting in significant urban-rural price differences. But the structure of the economy has fundamentally transformed in recent years, with the rural population aspiring to and consuming the goods and services once typically consumed by the urban middle classes. The transition to the market economy has thus significantly reduced differences between urban and rural prices. Global commodity price changes, therefore, impact rural inhabitants as much as their urban counterparts — despite the latter’s much higher consumption of food and energy compared with the former. CPI readings indicate there have been times in the recent past when food price inflation was more rigid and on the higher side in the rural areas. That makes sense because the prices of locally produced agricultural commodities also move up and down in sync with changes in the international markets.

Having said that, it is important to note that the surging global commodity prices pose serious downside risks to the inflationary outlook as well as the deteriorating current account balance as pointed out by the State Bank in its last monetary policy statement. That much is conceded by the finance ministry as well. Its latest monthly economic outlook report also admits to the potential risks to the economy associated with the geopolitical uncertainties in the wake of the Taliban’s takeover in Afghanistan and the possible resurgence of a fifth Covid wave in the country. Both the State Bank and government have implemented some steps, eg a nominal increase in borrowing costs, tightening of consumer-financing regulations, and imposition of regulatory duties on certain non-essential imports to moderate aggregate demand with a view to mitigating the risks. But these measures are unlikely to significantly impact the prices of most goods and services consumed by low-middle-income segments as long as international energy markets keep moving up and we remain a net food importer. Or, as claimed repeatedly by the finance minister, the government can keep enhancing its subsidy bill to absorb imported inflation.

Published in Dawn, September 30th, 2021