In 1976, the British government was forced to seek an IMF loan to stabilise the value of the pound sterling. In two years, it led to what is known as The Winter of Discontent. Inflation could not be brought down. There were strikes against pay cuts and other austerity measures. The anti-labour policies of a Labour government paved the way for Thatcher the Milk Snatcher.

In Pakistan, the winter has set in. Is it going to be the winter of our discontent? A government team has been negotiating with an IMF team to agree to the terms of a stabilisation package. Whether the government accepts a bailout on the IMF conditions or not remains to be seen. What is, however, apparent is that inflation is high and on a rising trajectory following the hike in energy prices to make up for the past under-pricing, double-digit depreciation of the rupee and increased import and regulatory duties on a large number of items. Following its calendar, the Pakistan Bureau of Statistics (PBS) announced an increase of 7 per cent in the Consumer Price Index (CPI) for October 2018, compared to 3.8 per cent in October 2017.

It seems the finance minister panicked and questioned the estimate. Although the PBS was taken out of the control of Ministry of Finance by former prime minister, Shahid Khaqan Abbasi, it seems the organisation continues to be a pushover. With no minister, no secretary, no chief statistician and no member in-charge of economic statistics, the PBS quickly obliged and the CPI was "rationalised by adjusting seven slabs of gas prices introduced by OGRA into five slabs of CPI methodology adopted by PBS" to 6.8 per cent. For 0.2 percentage points, the integrity and the transparency of the system was put at stake.

Not content, he blamed the media for ignoring the low rate of inflation for the lowest income group. True, the price increase for the lowest quintile is 3.94 per cent against the overall inflation rate of 6.78. However, this overall increase for the lowest quintile hides significant increases in some sensitive groups of commodities. The group including housing, water, electricity, gas and other fuels recorded an increase of 5.77 per cent. Transport, where the oil price rise hurts most, went through the roof at 22.12 per cent. It was higher than all the other four quintiles. At 6.84 per cent, clothing and footwear was also the highest for the lowest income group.

Education and health present an interesting story. In the cost of education, all quintiles faced a double-digit rise but the lowest income quintile experienced a higher increase than the highest income quintile. Health cost increases with increase in income, but an increase of 8.62 per cent for the lowest income quintile is very high. Mercifully, the food price index increase for the lowest income quintile was less than one per cent.

A serious problem with the CPI is that it only covers urban areas. According to a recent World Bank report, "State of Water Supply, Sanitation and Poverty in Pakistan", 80 per cent of the poor live in rural areas. The lowest income quintile of the CPI thus reflects the rising cost of living faced by the urban poor. One also needs to keep in mind the income levels defining the various quintiles. Those making up to Rs8,000 fall in the first quintile and the second quintile covers earners from Rs8,001 to Rs12,000. Although these are also the groups considered in the estimation of the official poverty line, the amount is less than the poverty line as well as the minimum wage when compared in real terms.

Come to think of it, the third and fourth quintiles of Rs12,001 to Rs18,000 and Rs18,001 to Rs35,000 do not really correspond to the upper income groups. In the top group of Rs35,000 and above, sky is the limit.

The closest indication of how the wretched of the earth are doing is provided by the Sensitive Price Indicator (SPI). It comes out every week and focuses on price changes in 53 essential items in 17 major cities. It has the same five income quintiles as the CPI. At the time of writing, the latest data for the week ended on November 15, 2018 showed an annualised increase of 5.71 per cent for the SPI combined for the five quintiles. It was the highest in ten weeks. For the lowest quintile, it was lower at 1.69 per cent, though the second highest in ten weeks. On November 22, 2018 the National Electric Power Regulatory Authority announced a hike of 47 paisa per unit in the electricity tariff on account of fuel cost adjustment. While it will impact upon the overall CPI, the lowest income quintile will not be affected due to the exemption given to the lifeline consumers.

Specific prices may matter to individuals and groups, but the State Bank has to worry about inflation, a macro indicator. It is concerned that core inflation, the non-food non-energy component of CPI, increased by 8.2 per cent in October 2018 compared to 5.3 per cent in October 2017. During the same time, another measure of core inflation, 20 per cent weighted trimmed mean CPI increased by 6.7per cent compared to 5.8 per cent. A core inflation jump that is well above the headline (overall CPI) inflation reflects the underlying inflationary pressures in the economy. Consequently, the real interests are falling.

To contain this demand pull, the State Bank had increased its target policy rate by 100 bps to 8.5 per cent in September. With the high expectations of support from friends and the diminishing necessity of finalising a stabilisation package with the IMF, the upward adjustment of the policy rate in the next monetary policy statement may be just 50 bps to make it 9 per cent. So the interest rate and the inflation rate are still away from the double-digit territory.

In addition to CPI and SPI is the WPI, the Wholesale Price Index. In July-October 2018-19, the WPI inflation was as high as 10.97 compared to a mere 1.39 per cent in the corresponding period of the previous year. This is way above the CPI inflation of 5.9 per cent and SPI inflation of 2.29 per cent. In October, the WPI inflation was even higher at 13.12 per cent. The situation in the previous two years was the reverse of it, with CPI inflation higher than the WPI inflation. Does this reversal have any serious implications for the future course of inflation?

In a State Bank study, Arby and Ghauri investigated the relationship between WPI and CPI to conclude that "both the CPI and WPI cause each other, as against the general perception that only CPI follows WPI. However, in case of food group, we can expect consumer prices of food items to follow changes in wholesale prices." In the recent surge in CPI and WPI, food group is not a significant contributor. As food matters most to the lowest income quintiles, the winter is less likely to see much discontent.