Dealing with rich-poor divide
May 24, 2021
CPI basket includes luxurious items while SPI based on basic necessity items. About 60% of the population falls in the “transitory poor” category it means a substantial population has no access to luxurious items; their needs revolve around basic necessities. The rules for indexation to the CPI have several potential disadvantages. They prevent real wage and employment adjustment in the presence of real shocks, causing suboptimal employment. In the presence of nominal shocks and inflation, indexation to prices can generate inconsistencies. The shock of inflation is not uniform for basic and luxurious commodities. The inflation through CPI is not suitable to be used for indexation as it cannot capture the inflationary shock to all income groups—Pay Indexation in Pakistan, Saud Ahmed Khan and Amena Urooj and Ahmad Fraz.