Millions of Pakistanis are frustrated that their Rupees aren’t going as far as they once did at the supermarket, on rent or on simple food purchases. Currently, the government touts a stable or a rather decreasing inflation rate, where prices are coming slowly-but-steadily down, but then is it really true? The food basket inflation as we know has been really worrying and the SPI index has marginally climbed up and not down in recent weeks! Well, Pakistan may not be alone in this conundrum where the inflation seemingly appears to be coming down, but continues to be stubborn where it really matters. Judy Shelton, a somewhat controversial economist, but someone who is very much gaining traction these days amongst Western public diasporas proposes quite a few radical solutions to be able truly bury inflation; the principal amongst them being to aim at zero inflation and not just suffice by taming inflation. Currently, central banks, including that in Pakistan, target a stable inflation rate, where prices either remain stable over a longer period of time or at best rise at a pace of no more than 2%. A gradual rise is supposed to happen so gradually that people barely notice it. A zero percent inflation target might get to be popular, but conservative economists have shied away from it thus far, as they feel that such a thing would backfire in many ways, including retardation of growth.

On the other hand, Ms Shelton argues that stable inflation in itself is an oxymoron, because it in effect means that it is not stable. She has long argued that a zero-inflation target would help an average everyday citizen who gets hurt when their pay-checks fail to keep up with prices. So, why not just go all the way and make it zero and make life much less complicated for all of us who have to use our local currency and constantly express things in terms of inflation adjusted? A point also argued very strongly in her new and recently released book about money titled “Good as Gold.” The downside of course is that zero inflation is uncomfortably close to deflation, the falling-price environment that invariably has its own negative dynamics and fall-outs. Deflation, as we know, was the defining feature of the Great Depression when falling prices made it nearly impossible for businesses and consumers to pay their debts. If history is any guide, one does not want to go down that path, something that has never worked out well. Although deflation might sound amazing to consumers - after all who does not like discounts - in practice falling prices cause demand compression. Also, deflation, more often than not, becomes a spiral with no end – because there is no real way for even the monetary policy to counter it.

In fact, one reason the central banks like to set an inflation target at around 2% is because they feel to be safely away from that deflation-danger zone. Lastly, remaining on this, another reason is that if research suggests that official measures of inflation are wrong – they may overstate actual inflation. And that means targeting zero could translate to deflation. Bill English, a Yale University professor and former top official at the Fed, opined that deflation can be especially hard to escape because eventually, the Fed runs out of room to cut rates.

So, then what rationale is economist Shelton offering? Her arguments are very simple where she says that a government has to make up its mind on what it truly wants. No point giving a virus a lifeline, as it is always more than likely than not to come back again to spread; and each time with a more severe vengeance. Her take being that one can have a healthy economy with some mild deflation, and she thinks that it will not affect people’s decisions to buy or consume, since one needs to trust supply and demand and let people respond to those price signals and not to feel like anyone else is controlling their behaviour. Shelton dismisses the tipping over to deflation fears and the impact on consumer psychology. The argument is that if central banks have consistently failed to control inflation over a long period of time, then the people should not suffer, as the fault lies with policy making in going too soft on inflation. It is important whosoever heads the central bank clearly understands that the central bank adopts a new attitude focused on preserving its people’s purchasing power.

Her grouse being that where is the inflation accountability, as after all no one has ever gotten fired due to a failure in bringing down high inflation? In her opinion, it is the basic right of the people to have a central banker who is more focused on their well-being rather than following traditional techniques. Well, surely some food for thought at least here in Pakistan, where over the last decade there has been an erosion of an individual’s disposable income like perhaps nowhere else in the world.

Dr Kamal Monnoo
The writer is an entrepreneur and economic analyst. Email: kamal.monnoo@gmail.com