CHAPTER 7

Inflation l''.!!.,'!''l!

Inflatiol is a persistent change in the prices of goods and services in an economy over a period of
tirne. It is generally believed that persistently high inflation hurts economic groMh and erodes the
value of local currency. lt has a diverse effect on perceptions and expectation of different segments
of society and therefore has a differential impact on decision-making of different economic agents.
Historically, Pakistan economy has seen ups and down in inflationary trends.

Fig-7.1r Historical Trend of CPI, Food & Non-Food (2007-08=100)

26
21
)',
20
\ q 17.03
.18 \ ---.Food
*{*Fead Non.Food
H16
:12
-10
8
6
4
)
**\19!.t- ffi--a'
0
i N m e e r € -!.
= -C.
€6 *R iR rR 3 x !x E
x i ==
F llR: *f
R;
dd
= =
Source: Pakistan Bureau of Statistics Years

A persistent increase in the fiscal deficit during the last two years has been an important factor
adding to dernand pressures in the econorny. During FYl8, development expenditures declined,
while growth in current expenditures accelerated. Thus, the composition of expenditure shifted from
investment to more consumption. In this backdrop of higher economic activity and domestic
demand, the groMh in imports remained strong. Tliough all the major commodity groups except for
food recorded rtrong growth, the major contribution to higher imports came from petroleum,
machinery, metals, and chemicals.

The pass-through of exchange rate depreciation and higher international commodity prices, in
addition to strong underlying demand pressures, started to reflect in higher year-on-year inflatibn
from May 2018. The core inflation - excluding volatile food and energy prices - after remaining
sticky around 5.5 percent, picked up pace from March 2018 onwards. Yet, the average inflation was
slightly lower during the year, primarily due to low food inflation on the back of more than sufficient
food siocks available in tl-re country. Closely watching these developments and the likely impact of
an expansionary fiscal policy and worsening external accounts on the macroeconomic stability,
especially the future inflation path, the Monetary Policy Committee (MPC) raised the policy rate,
reversing the multi-year easy monetary policy.

The headline inflation measured by Consumer Price lndex (CPf during the last five years remained
on average at 4.8 percent. The preceding fiscal year (FY 2018), CPI inflation was contained to 3'9