How big is the Ramazan inflation effect?

The Ramazan inflation effect is clear and sharp, but does not fully occur in the holy month, according to research conducted by economists at the State Bank of Pakistan.

In two working papers produced by the central bank’s research department, economic analysts look at the effect of Ramazan on overall inflation and find that, while there is indeed an effect on prices during the season, occurs primarily in the preceding month of Shaban, and appears to primarily be driven by Ramazan-specific commodities like fruits and vegetables.

The first working paper is one that was published in February 2010, titled “Ramadan effect on price movements: evidence from Pakistan,” written by Muhammad Akmal and Muhammad Usman Abbasi, two staff members at the State Bank’s research department. They examined data from July 1991 to December 2008, a period that included 18 Ramazans, and found no significant effect of the holy month on the consumer price index, the primary measure of inflation in the country.

Their research, however, was confined to finding the specific effects of Ramazan, and did not look at the overall seasonal effects of the Islamic calendar, a fact that they acknowledged in their paper, suggesting that much of the price increases likely took place before the holy month actually started. Nonetheless, they did find that prices of fruits do go up significantly during Ramazan.

The second working paper – published in April 2012 – sought to conduct a more complete analysis of consumer patterns in an Islamic calendar compared to a Gregorian one. Titled “Construction and seasonal patterns of Islamic Hijri calendar monthly time series: an application to consumer price index in Pakistan”, this paper was written by Riaz Riazuddin, the chief economic advisor at the State Bank of Pakistan.

Riazuddin tried to reconstruct the CPI in a manner that would allow him to track inflation over Islamic lunar months, not Gregorian solar months. He used a bigger data set, analysing inflation from January 1976 to December 2008, a period covering a full cycle of 33 Gregorian years and 34 Hijri years. That data set yielded a far more interesting set of insights.

It demonstrates, for instance, a very sharp spike in inflation in the month of Shaban, immediately preceding Ramazan. Median inflation during Shaban is close to 0.95%, the highest in the entire Islamic calendar, and also has the sharpest increase from the previous month. By comparison median inflation in Ramazan is around 0.7%. On an annualised basis, these numbers translate to 12% and 8.7% respectively.

The papers are silent, however, on what is the precise cause for this rapid increase in prices, though they do recommend that the government should start collecting price data both on a Gregorian and HIjri calendar basis so as to be able to more accurately analyse consumer behaviour.

Anecdotal evidence gathered by The Express Tribune suggests that the reason behind the Ramazan price hike has less to do with price gouging and more to do with inefficient supply chains that cannot absorb the sudden rise in demand for food. The prices of packaged consumer goods, for instance, do not go up because these companies have more sophisticated supply chains that are geared to handle seasonal fluctuations in demand. Some food and beverage companies actually announce price decreases
during Ramazan.

Consumers who shop at modern retail outlets, like Carrefour’s Hyperstar, or Metro or even the local Imtiaz Supermarket chain in Karachi, find that prices for many commodities have either not risen at all, or if they have, by a smaller amount than smaller stores with less extensive supply chains.

The existence of such sharp seasonal variations in food demand suggests that there is a considerable room for companies looking to invest in developing and enhancing the country’s food supply chain.

Published in The Express Tribune, July 12th, 2013

Farooq Tirmizi

CEO, Elphinstone

Farooq Tirmizi is the founder and CEO of Elphinstone, the financial services firm that operates SmartRupee.

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