Pakistan’s Inflation Hits 3.5-Year Low at 6.9%

Pakistan’s annual inflation rate dropped to a 3.5-year low of 6.9%, largely driven by a favorable base effect and lower prices of non-perishable food items. This significant decline, reported by the Pakistan Bureau of Statistics (PBS) on Tuesday, opens up the possibility for the central bank to implement multiple interest rate cuts to stimulate the economy, which has been struggling with high poverty and unemployment.

In a rare occurrence, Pakistan’s annual inflation rate, core inflation rate, and average inflation rate all fell to single digits. This indicates a considerable easing of inflationary pressures and provides room for policymakers to shift towards more accommodative monetary policies aimed at reenergizing the economy.

However, concerns have been raised about the methodology used to monitor electricity prices. The current method captures the consumption of only 50 units per month, accounting for just 4% of residential consumers. This has led to criticism as the electricity bills for lower-income groups are now consuming up to 30% of their monthly incomes.

The PBS data revealed that the inflation rate decelerated to 6.9% in September compared to the same month last year. This marks the slowest pace of inflation since January 2021 when the reading stood at 5.7%. The lower inflation reading was unexpected, beating market and finance ministry expectations, which had forecasted inflation at 8% for the previous month.

The decline in inflation can be attributed in part to a favorable base effect, as inflation had surged to 31.4% in September last year. The reduction in the prices of essential goods, such as wheat, flour, cooking oil, and petroleum products, also provided some relief to consumers. The Punjab government’s decision not to procure wheat from farmers led to a crash in commodity prices, while falling international crude oil prices helped reduce domestic petrol and diesel prices.

Further relief came from the National Fiscal Pact, signed by the federal and provincial governments under the International Monetary Fund (IMF) programme. The pact includes commitments to avoid setting agricultural support prices and to refrain from purchasing commodities. This decision is expected to impact upcoming sugarcane prices.

Despite these reductions, double-digit increases were observed in the prices of clothing, footwear, perishable food items, house rents, water, gas, health services, and education. These items have been affected by heavy taxation, including the imposition of a sales tax and a 2.5% withholding tax on supplies.

With the inflation rate falling to 6.9%, there is growing speculation that the State Bank of Pakistan (SBP) will implement a steep cut in interest rates during the next Monetary Policy Committee meeting. The current interest rate stands at 17.5%, which is about 10.6% higher than the prevailing inflation rate. Economists believe that the central bank has room to cut interest rates by 3% to 4% in the upcoming review.

The government has set an inflation target of 12% for the current fiscal year, while the IMF projects inflation to be around 9.5% by the end of the fiscal year. In urban areas, the annual inflation rate also slipped into single digits, dropping to 9.3%, while in rural areas, it fell to 3.6%. Food inflation in cities decelerated to 1.7%, with rural areas even experiencing 1% deflation in food prices.

However, prices of perishable food items, such as onions, fresh vegetables, and fruits, surged by over 20% last month on an annual basis. On the other hand, prices of non-perishable food items, such as wheat, wheat flour, sugar, and cooking oil, experienced significant reductions.

Core inflation, which excludes energy and food prices, also dropped to 9.3% in cities, signaling a decrease in underlying inflationary pressures. In rural areas, core inflation slowed to 12.1%. Despite this, gas charges and motor vehicle taxes have remained high, with gas prices up by 319% compared to the previous year, and motor vehicle tax increasing by 169%.

The average inflation rate for the first three months of the fiscal year has also dropped to 9.2%, which is well below the official annual target of 12%. However, urban areas continue to face an average inflation rate of 11.9%, suggesting that inflationary pressures remain unevenly distributed across the country.