Inflation reaches 4-year low but pressures persist

ISLAMABAD: Pakistan’s inflation rate ticked up slightly to 7.17 percent in October 2024, from 6.93 percent in September, but it remains a far cry from the 26.89 percent level seen a year ago. This trend marks the lowest inflation in nearly four years and the third consecutive month of single-digit inflation, a milestone not reached since early 2021.

For the first four months of the fiscal year, inflation has averaged 8.67 percent, down sharply from last year’s 28.45 percent over the same period, according to the Pakistan Bureau of Statistics.

Economists are cautiously optimistic about Pakistan’s inflation cool down, but concerns linger over the central bank’s tight monetary stance. Real interest rates have remained in positive territory since March, now standing at an eye-watering 1,033 basis points (or 10.33pc). This hefty margin—derived from the State Bank of Pakistan’s policy rate of 17.5pc minus the current CPI inflation of 7.17pc—may prove a double-edged sword. While it bolsters the rupee and curbs inflation, it also risks undermining debt sustainability as borrowing costs escalate.

Underpinning Pakistan’s macroeconomic policy framework is the $7 billion IMF Extended Fund Facility approved in July. The IMF projects inflation will moderate to 9.2pc this fiscal year, a far cry from the 23.4pc recorded in FY2024. Yet, questions about sustainable growth and debt management remain as the country navigates the IMF program’s strictures.

Analysts argue that a rate cut is overdue. With real rates so elevated, they warn that prolonged high interest rates could stifle growth and worsen Pakistan’s fiscal woes. Lowering rates, they suggest, would not only stimulate economic activity but also provide fiscal breathing room, reducing the debt servicing burden that currently devours over three-fourths of government revenues. If unaddressed, these dynamics threaten to compound Pakistan’s budget deficit, casting a long shadow over its fragile recovery.

To further alleviate debt pressures, the government has embarked on a T-bill buyback programme, launched in late September. This move aims to reprofile debt, extending maturities and curbing immediate servicing costs. In the coming months, a delicate balancing act will be required to sustain the inflation decline without stalling economic growth, a task complicated by debt, energy volatility and policy constraints.

Improvement in inflation, however, does not assure future stability. Analysts caution that fluctuations in global energy prices and exchange rates could reignite inflationary pressures, highlighting the need for careful policy adjustments.

The modest inflation rise in October was driven by food prices, which climbed 0.9 pc after a September dip. Staples like pulses, onions, fish, chicken, and fresh vegetables posted steep annual hikes—pulse gram rose 72.37pc, onions 38.13pc, and fish 33pc. Inflation in housing, clothing, and footwear sectors remained elevated, while transport costs declined 6.1pc, though less sharply than last month.

Gas prices surged 319pc over the year, reflecting the broader strain on household budgets. Economists attribute the easing of inflation to stabilized commodity markets, stronger supply chains and a relatively stable rupee, but note that a base effect—the comparison against last year’s high rates—also played a role in the drop.

The Wholesale Price Index (WPI) rose to 3.9pc in October, up from a 50-month low of 1.95pc in September. This represents a stark contrast to October 2023’s 24.62pc, hinting that consumer prices may stabilize further as WPI impacts tend to filter through to retail prices over time. Historical data shows WPI averaging 10.9pc since 2000, with peaks like August 2022’s 41.3pc.

Core inflation, which excludes volatile food and energy prices, eased to 8.6pc in October, down from 9.3pc in September and a marked reduction from last year’s 18.5pc in October. Urban inflation steadied at 9.3pc, while rural inflation edged up to 4.2pc from 3.6pc the previous month, indicating a balancing trend between urban and rural price pressures.

As per the PBS data, on month-on-month basis, fresh vegetables surged by 12.9pc, onions rose 7.6pc, and wheat climbed 6pc. Other notable rises included pulse gram 5.7pc, fish 5.5pc and condiments and spices 5.5pc. Chicken, tomatoes, wheat flour, and bakery items also saw moderate gains. However, sugar price fell 4.5pc, pulse mash dropped 2.5pc, and eggs dipped 1pc. Declines were also seen in pulse masoor, fresh fruits, and rice.

Water supply costs jumped 8.6pc, electricity rose 5pc, and household textiles went up nearly 4pc. Furniture, hospital services, and postal services recorded smaller increases. Motor fuel decreased 2.3pc, transport services fell 2.1pc, and liquefied hydrocarbons slipped 0.9pc. Construction input and household cleaning items also dropped slightly.