Pakistan’s inflation landscape has marked a significant turning point with the Sensitive Price Indicator (SPI) reaching a three-year low. For the week ending September 5, 2024, the SPI recorded a notable decrease to 14.07% compared to the same week last year. This milestone reflects a substantial easing in inflation, largely driven by reductions in energy and food prices.
Weekly SPI Trends
On a week-on-week basis, the SPI experienced a modest decline of 0.15%. This reduction is indicative of a broader trend of easing inflation that has been ongoing for the past four weeks. The Pakistan Bureau of Statistics (PBS) reported that the consistent decrease in the SPI, alongside a drop in the Consumer Price Index (CPI)-based inflation to 9.6%—a level not seen in three years—has led to heightened speculation regarding potential monetary policy adjustments.
Impact on Monetary Policy
The easing inflation rate has generated anticipation that the State Bank of Pakistan (SBP) may implement a third consecutive cut in its policy rate during its upcoming monetary policy meeting on September 12, 2024. Financial analysts are forecasting a potential reduction of 1 to 1.5 percentage points. This expected rate cut aligns with the deceleration in inflation and is anticipated to provide a much-needed boost to Pakistan’s economic activities and growth.
Previously, the SBP had reduced the policy rate by a total of 2.5 percentage points in June and July 2024, bringing it down to 19.5%. Despite these reductions, the real interest rate, calculated by subtracting CPI inflation from the policy rate, remains high at approximately 10%. The business community is advocating for a more significant cut, suggesting a reduction of up to five percentage points to further stimulate economic growth.
Breakdown of Price Changes
The SPI tracks the prices of 51 essential commodities, with data collected from 50 markets across 17 cities in Pakistan. For the week ending September 5, 2024, the data revealed that out of these 51 items, prices for 19 (37.25%) items increased, 13 (25.50%) items decreased, and the prices of the remaining 19 (37.25%) items remained unchanged compared to the previous week.
The slight 0.15% decrease in week-on-week inflation was primarily influenced by a notable drop in the price of tomatoes. Tomatoes fell by 14.54%, with the price dropping to Rs111.81 per kilogram from Rs130.84 per kilogram the previous week. This significant reduction in the price of tomatoes contributed substantially to the overall easing of inflation.
Similarly, the price of chicken (farm broiler live) decreased by 1.55%, falling to Rs426.08 per kilogram from Rs432.81 per kilogram. Wheat flour also saw a decrease of 1.31%, with its price dropping to Rs1,761.37 for a 20kg bag, compared to Rs1,784.69 per bag the previous week. Chilli powder (200-gram pack of National) experienced a reduction of 1.30%, bringing its price down to Rs320 per pouch from Rs324.23 per pouch.
Fuel prices also saw declines: hi-speed diesel dropped by 1.23% to Rs263.96 per litre from Rs267.26 per litre, while petrol edged down by 0.68% to Rs260.31 per litre from Rs262.09 per litre. Other essential items, including masoor pulse, sugar, mash pulse, and cooking oil, saw price reductions of up to 0.59%.
FAQs about Pakistan’s Inflation and Monetary Policy
1. What is the Sensitive Price Indicator (SPI)?
The Sensitive Price Indicator (SPI) is a weekly measure of inflation that tracks the price changes of 51 essential commodities. It is used to gauge short-term changes in the cost of living, focusing on items that are sensitive to price fluctuations.
2. What was the SPI reading for the week ended September 5, 2024?
For the week ending September 5, 2024, the SPI decreased to 14.07%, marking a three-year low. This figure reflects the rate of inflation compared to the same week in the previous year.
3. How did the SPI change on a week-on-week basis?
On a week-on-week basis, the SPI saw a decrease of 0.15%. This drop was largely attributed to lower prices in the energy and food sectors.
4. What factors contributed to the recent slowdown in inflation?
The recent slowdown in inflation was primarily driven by reductions in the prices of essential commodities such as tomatoes, chicken, wheat flour, and various fuels.
5. What is the Consumer Price Index (CPI)-based inflation rate, and what was it recently?
The Consumer Price Index (CPI)-based inflation rate, which reflects the overall change in prices of goods and services over time, recently dropped to 9.6%, a level not observed in three years.
6. What actions are expected from the State Bank of Pakistan (SBP) in response to the inflation data?
In response to the recent inflation data, financial markets are expecting the SBP to reduce its policy rate by 1 to 1.5 percentage points during its monetary policy meeting scheduled for September 12, 2024.
7. How has the SBP’s policy rate changed recently?
The SBP had previously reduced the policy rate by a total of 2.5 percentage points in June and July 2024, bringing it down to 19.5%.
8. What is the current real interest rate in Pakistan?
The real interest rate, calculated by subtracting CPI inflation from the policy rate, currently stands at approximately 10%.
9. What is the business community’s stance on the policy rate?
The business community is advocating for a more substantial cut in the policy rate, suggesting a reduction of up to five percentage points to better support economic growth.
10. Which essential commodities saw price changes during the week ended September 5, 2024?
During this week, prices of 19 items increased, 13 items decreased, and 19 items remained unchanged. Notable price decreases were observed in tomatoes, chicken, wheat flour, and various fuels.
11. How much did the price of tomatoes decrease?
The price of tomatoes fell by 14.54%, from Rs130.84 per kilogram to Rs111.81 per kilogram.
12. What are the implications of the recent inflation data for consumers and businesses?
The recent decrease in inflation and commodity prices may provide relief to consumers and potentially stimulate economic activity. For businesses, a lower policy rate could reduce borrowing costs and encourage investment and growth.
Conclusion
The significant drop in Pakistan’s SPI to a three-year low and the reduction in the CPI-based inflation rate are positive indicators for the country’s economic outlook. The expected monetary policy adjustments by the SBP could further enhance economic stability and growth, benefiting both consumers and businesses.
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