I. Introduction
The sustained and significant reduction in inflation observed during the last three years constitutes one of the key achievements of Pakistan. During the first seven years (1990-97) of the 1990s the average annual inflation rate, measured on the basis of the consumer price index, remained in the double-digit (11.4%). Poor fiscal management resulting in the monetization of large fiscal deficits, declining economic growth causing supply bottlenecks of essential items, frequent upward adjustment of utility charges, frequent downward adjustment of rupee viz. US dollar, and excessive reliance on indirect taxes for resource mobilization are some of the factors responsible for the persistence of double-digit inflation during 1990-97.

Inflation in Pakistan continued to exhibit a declining trend thereafter. It declined to 7.8 percent in 1997-98 and further to 5.7 percent in 1998-99 (See Table 8.1).

Source: Federal Bureau of Statistics

Relatively tight monetary policy, improved supply situation of essential items, little upward movements in administered prices, reduction in tax and tariff rates, and depressed international prices of Pakistan's major imports are some of the factors contributed to bringing inflation down to the single-digit level. Food and non-food inflation followed the overall inflationary patterns and declined to a single-digit level. As against an average food inflation of 12.4 percent during 1994-97, it declined to 7.6 percent in 1997-98 and further to 5.9 percent in 1998-99. Similarly, non-food inflation declined to 8.0 percent and 5.6 percent, respectively from an average of 11.0 percent during the same period (See Table 8.2).

(Percentage)

Source: Federal Bureau of Statistics

The hard-earned progress towards taming the inflation was further consolidated in 1999-2000. Inflation decelerated further to 3.4 percent during the first ten months of the current fiscal year as against 6.1 percent in the corresponding period of last year. Although the food and non-food inflation exhibited a declining trend it was the former which decelerated sharply to 2.0 percent as against 6.2 percent of the corresponding period of last year. Non-food inflation is estimated at 5.0 percent as against 5.9 percent of the corresponding period of last year (See Table 8.2.). Before we go into the details of the price situation in 1999-2000, a few words regarding the various price indices that are used in measuring the cost of living in Pakistan are in order.

II. Measuring Price Indices
In Pakistan, the four types of price indices are used to measure price changes. These are: (i) Consumer Price Index (CPI); (ii) Wholesale Price Index (WPI); (iii) Sensitive Price Indicator(SPI), and the GDP deflator. The CPI captures monthly trends in retail prices of 460 items, covering nine commodities groups, three broad categories of industrial, commercial and government employees, and collected from 25 urban centres. The CPI is also calculated for five separate income groups such as, upto Rs 1500, Rs 1501 to Rs 4000, Rs 4001 to Rs 7000, Rs 7001 to Rs 10,000 and Rs 10,000 per month and above. The weights of the different consumer items in a basket of commodities were constructed from especially designed survey conducted in 1990-91. The prices used in the construction of monthly WPI are generally those which conform to primary sellers at "Mandi" or ex-factory level. It covers 97 commodities and does not include services. The SPI coverage is a weekly index but limited to 47 essential items from 12 centres in 50 markets, used by the typical consumers earning income upto Rs.1500 per month. The GDP deflator (market prices) is based on prices of all goods and services produced in the economy during a year. It is therefore, more broad-based measures of inflation. These four indices of inflation differ among themselves in terms of their coverage of commodities and markets. Notwithstanding these difference, the consumer price index has traditionally been regarded as a better indicator of inflation as well as used for measuring cost of living.

III. Inflation in 1999-2000
The declining trend in inflation that was set into motion in 1997-98, continued with a relatively stronger force during the outgoing fiscal year 1999- 2000. Inflation during the first ten months of the current fiscal year declined further to 3.4 percent as against the target of 6.0 percent and last year's level of 6.1 percent in the comparable period. The trend of falling inflation continued virtually uninterrupted since August 1998 with minor spikes in between. The rate of deceleration is more pronounced since March 1999 [see Table 8.3]. A number of factors have contributed to keep the inflation subdued in 1999-2000. Prominent among the factors are the sharp containment of money supply growth which is estimated at 3.2 percent during July-March 1999-2000 against the target of 9.4 percent. Beside lower-than-targeted monetary growth, strong rebound in agriculture helped improve food supply situation, relatively depressed domestic demand, and weak international commodity prices have been mainly responsible for the lowest inflation in the recent history of the country.

Source: Federal Bureau of Statistics.

Food and non-food inflation also remained subdued during 1999-2000. A strong recovery in agriculture improved the food supply situation and as a result food inflation remained all time low in many years. As against an average of 10.5 percent during 1994-99, food inflation decelerated sharply to 2.0 percent in the first ten months of the current fiscal year.

Non-food inflation also remained subdued during 1999-2000. As against an average of almost 10 percent during 1994-99, non-food inflation declined to 5.0 percent in the first ten months of current fiscal year. During the first quarter of the current fiscal year, non-food inflation remained around 3.0 percent but various adjustments in gas and petroleum prices during second quarter onward caused acceleration in non-food inflation. The non-food inflation increased to 5.6 percent in second and 5.8 percent in the third quarter of the current fiscal year. Within the non-food inflation., price indices of transport and communications group (7.8%), laundry and personal appearance group (5.9%), apparel & textile group (5.8%), and recreation, entertainment & education (4.9%), registered an increase which are higher than the overall increase in the price level [see Table 8.4]. It is, therefore, safe to say that the current year inflation is mainly driven by non-food inflation.

(Percentages)

Source: Federal Bureau of Statistics

a) Wholesale Price Index (WPI)
The WPI has increased by 1.6 percent during July-April, 1999-2000, as against 6.7 percent in the same period last year. The lower increase in the WPI as compared with last year has mainly been due to the decline in the prices of raw materials (-10.67%), building materials (-3.16%), and smaller increase in food (1.3%) and non-food group (1.8%). The decline in raw material group has largely been on account of decrease in the prices of cotton and cotton related products. In the case of building material group, the decline in prices of cement (-4.20%), iron bars (-3.78%) and sanitary pipes (-2.49%) have been responsible for disinflation in this group. The changes in the WPI by main commodities groups are given in Table 8.5:

Source: Federal Bureau of Statistics

b) Sensitive Price Indicator(SPI)
The sensitive price indicator (SPI) is based on the prices of 47 essential consumer items belonging to the commodity basket of the CPI. The SPI is highly sensitive to price changes in the food items because 33 items out of 47 are food and the remaining 14 are the non-food items. During July-April 1999-2000, the increase in the SPI on annualized basis is 1.6 percent, as against 6.8 percent in the comparable period last year. The slower increase in the SPI is mainly due to the decline in the prices of potatoes (-28.9%), onion (-29.4%), chicken (-24.0%), red chilies (-20.4%_), eggs (-16.9%) and moong pulse (-13.9%). However, the prices of certain mass consumption items like wheat, rice, mash & gram pulses, sugar and gur have recorded price increases, mainly because of the seasonal variations and the demand-supply gap.

IV. Inflation by Income Groups
The CPI compiled for the five different income groups for the first 10 months of the current fiscal year exhibit more or less a similar pattern of last year. The lowest income group has faced lowest inflation (3.0%) while the highest income group experience highest inflation (5.0%). It is well-known that low income group people spend much of their income on food consumption and since food inflation has been minimal this year, therefore, the lowest income group faced comparatively lower burden of inflation. This income-wise inflation is given in Table 8.6:

Source: Federal Bureau of Statistics

V. Price Stabilization
The hard-earned success in taming the inflation will continue to receive greater attention and the government will make every effort to keep the inflation low. To maintain price stability, the government will continue to pursue a relatively tight monetary policy complemented by a prudent fiscal management. The monetary aggregates will be closely monitored to ensure that money supply does not become a source of inflation. The government will also make efforts to keep the food inflation low by augmenting agricultural supplies through higher production and, if necessary, through imports of essential commodities. In addition, other institutional measures will be taken to maintain price stability. These include the use of country-wide outlets of the Utility Store Corporation to ensure proper supplies of essential consumer items, and the special weekly bazaars. The Committee on Kitchen Items and the Economic Coordination Committee of the Cabinet will continue to keep a close watch on the price developments and supply position of the essential consumer items.