The fight against inflation

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In something of a novelty the prime minister has tried to disarm people burdened by high prices by asking for their help in fighting inflation. During his second public interaction over the telephone, Prime Minister Imran Khan reiterated that people should not panic and that relief was on the way. Such initiatives would ordinarily be welcomed because taking people along in matters of high public importance is after all the very essence of democracy. But the government will need to explain this initiative a little further because the state does, for all intents and purposes, have a built in mechanism to control prices. That is the interest rate regime controlled by the central bank, in our case the State Bank of Pakistan (SBP), which loosens or tightens the screws on the economy by adjusting lending rates in keeping with price trends.
One problem, however, is that our inflation is not the usual, demand-pull type, where rising economic activity pushes up aggregate demand to the point that the entire economy overheats and rates have to be pushed up to curtail overall money supply. Ours, instead, is the far more destructive cost-push type of inflation where input costs push up end prices without any corresponding increase in demand or earnings. And everybody knows that a very disturbing combination of high energy cost, unrealistic taxes to please the IMF, etc, and what the PM himself calls a mafia is responsible for this current bout with cost-push inflation that has got the people very upset and the government on the verge of desperation. It was because of the high prices after all, and the government’s inability to do much about them, that the previous finance minister was sent packing. At least that is what the government itself said about it. So not only is the clock ticking but the PTI administration is now aware of it. Perhaps the PM wanted the people to help by identifying unnatural irritants that influence prices, especially in items of daily use. Or, since he also said that change would not come overnight, maybe he was trying to convince the people that they would have to help by keeping his administration in power after the next general election as well; so that the change – crackdown against mafias – that he has introduced can go on till the job is done. Either way, it will help a lot if his vision can be explained a little bit more. With the holy month of Ramzan just around the corner, prices are itching to rise even without all the pressures that they have come under lately. So timing will be of the essence.