Kaif Afridi
We come across daily news highlighting the caretaker government and military leadership's efforts to combat smugglers and hoarders of dollars, leading to a gradual drop in the dollar's value. Surprisingly, despite this decline, inflation continues to persist. In recent days, the dollar, which was previously priced at Rs 335 in the open market, now stands at Rs 278.
Simultaneously, crackdowns are underway against unregistered hundi hawala traders. Today, in the interbank market, the dollar depreciated by Rs 1 to reach Rs 278.50. Similarly, in the open market, the dollar fell by Rs 1 to Rs 278.
The perplexing question is: why isn't the inflation, which was primarily driven by the dollar's surge, diminishing as the dollar recedes?
Also Read: Lady Health Workers Announce Sit-In Over Salary Delays and Job Regularization
Dr. Muhammad Shahid, an economist interviewed by TNN, explained that typically when imports decrease and exports rise, it stabilizes the rupee and enhances its value. Unfortunately, this is not the current situation in Pakistan. However, the government's crackdown on dollar smuggling has contributed to reducing the dollar's value in Pakistan and stabilizing the rupee.
In principle, as the dollar appreciates, prices of goods tend to rise, and when the dollar depreciates, these prices should decrease. However, economic theory introduces a concept called "prices are rigid downward." This implies that once commodity prices have increased due to a stronger dollar, they do not decrease as rapidly, nor are they flexible. In simple terms, shopkeepers, having purchased expensive items, cannot instantly sell them at lower prices.
Take the example of medicines: the stronger dollar increased their costs. Now, with these medicines in the market and their prices set, they cannot be quickly discounted. This phenomenon is referred to as menu cost (also known as "menu pricing" or "price rigidity,"). Therefore, as the dollar's value declines, the impact on food prices is gradual.
Domestic items like vegetables and fruits, unaffected by the dollar, will only see price reductions when their supply increases. In essence, until the supply of these items rises significantly, reducing their prices will be challenging. However, products linked to the dollar, such as energy and transportation, should see price reductions in response to the dollar's decline.
