In a remarkable turn of events, Pakistan’s inflation rate dropped to its lowest level in almost four years, providing much-needed relief to the economy and consumers. The Pakistan Bureau of Statistics (PBS) reported that the Consumer Price Index (CPI) rose by only 6.9% in September 2024 compared to the same month last year. This marks a significant decline from the inflation rate of 9.6% recorded in August and a sharp drop from the staggering 31.4% inflation experienced in September 2023.
This slowdown in inflation was unexpected by many analysts, who had predicted a rate of around 7.5%. Instead, Pakistan’s inflation came in within the State Bank of Pakistan’s (SBP) target range of 5-7%, offering a glimmer of hope for economic recovery.
A Drastic Change: Comparing September 2024 to Previous Years
The 6.9% inflation rate in September 2024 represents a major improvement from the same time last year, when inflation was a severe 31.4%. It also signifies a major shift in the economic landscape. For context, the average inflation rate for the first quarter of FY25 stood at 9.2%, a dramatic reduction from the 29.0% recorded in the same period last year.
The reduction in inflation can be attributed to several factors, most notably the decline in food and fuel prices. The economy also benefited from improved global economic conditions, and policy measures introduced by the government and the SBP helped stabilize price levels.
The Impact of Falling Fuel and Food Prices
One of the primary drivers behind the drop in inflation was the significant decrease in fuel and food costs. Transport costs, for example, fell by 7.3% over the previous year, largely due to the steep fall in international oil prices. This has had a ripple effect across various sectors of the economy, as lower fuel prices helped reduce transportation and production costs.
Food prices, too, saw a notable decline. According to the PBS report, food prices in September 2024 were 0.6% lower compared to the same time last year. This decline in food prices is particularly significant for a country like Pakistan, where food inflation has historically placed a heavy burden on consumers. By easing the cost of essential items, the drop in food prices has contributed to a marked reduction in overall inflation.
Core Inflation: A Slower Pace of Increase
While the headline inflation figures were encouraging, core inflation—measured by excluding food and energy prices—remains a key indicator of underlying inflationary pressures. In September 2024, core inflation rose by 10.4% year-over-year (YoY), a slight decrease from the 11.9% recorded in August 2024 and a significant drop from the 22.1% in September 2023.
On a month-to-month (MoM) basis, core CPI increased by 0.3% in September 2024, compared to 0.5% in the previous month. This slower pace of increase in core inflation indicates that the pressures on prices for non-food and non-energy items are easing, albeit at a slower rate than the broader inflation index.
Monthly Trends: A Positive Shift
One of the most promising aspects of Pakistan’s inflation story in September is the month-over-month (MoM) decrease in the CPI. In September 2024, the CPI fell by 0.5%, a significant improvement from the 0.4% increase recorded in August 2024. This is particularly noteworthy when compared to the sharp 2.0% MoM increase seen in September 2023.
The monthly drop in inflation signals that price pressures are subsiding on a shorter-term basis, reflecting improved market stability and easing of cost pressures in various sectors of the economy. These trends offer optimism that inflation may continue to moderate in the coming months, provided external shocks—such as a spike in global oil prices—are avoided.
The IMF’s Optimism: Revised Inflation Forecasts
The recent inflation data has also led to a revision of future inflation forecasts. Last week, the International Monetary Fund (IMF) granted Pakistan a $7 billion loan package and subsequently revised its inflation forecast for the country. The IMF now projects consumer price gains to average 9.5% in FY25, a significant improvement from the earlier forecast of 12.7%.
This revision indicates that the IMF has confidence in Pakistan’s ability to manage inflationary pressures and maintain economic stability. The slower-than-expected inflation will also provide the SBP with greater flexibility to focus on growth-oriented policies, a shift that will be crucial in supporting economic recovery.
Monetary Policy Easing: Room for Growth
The SBP has been taking active steps to combat inflation over the past few months, including a series of interest rate cuts. Since June 2024, the SBP has slashed interest rates by a cumulative 450 basis points. This monetary easing is aimed at stimulating economic activity, boosting investment, and fostering growth.
With the CPI-based inflation rate now at 6.9% and the policy rate at 17.5%, the real interest rate currently stands at 10.6%. This positive real interest rate gives the SBP significant room to further ease monetary policy without the risk of igniting new inflationary pressures. Policymakers are expected to continue reducing interest rates in the near future, which could help spur economic growth while keeping inflation under control.
The Role of Fiscal Policy
While monetary policy has been a key driver in curbing inflation, fiscal policy has also played an important role in stabilizing the economy. The government’s efforts to manage budget deficits, improve tax collection, and control spending have contributed to easing inflationary pressures. Additionally, the $7 billion loan package from the IMF provides much-needed financial stability, ensuring that Pakistan can manage its debt obligations and avoid fiscal crises that could lead to inflation spikes.
Risks and Challenges Ahead
Despite the positive news, challenges remain for Pakistan’s economy. One of the main concerns is the global oil market. A sudden rise in oil prices could reverse the gains made in inflation control, particularly since transport costs are heavily influenced by fuel prices. Furthermore, while food prices have declined, they are subject to volatility based on factors like weather patterns, global commodity prices, and local supply chain issues.
Another challenge is sustaining the growth momentum while keeping inflation in check. Although inflation has moderated, maintaining this downward trajectory will require continued fiscal discipline, monetary easing, and structural reforms to support long-term economic stability.
Looking Ahead: What This Means for Pakistan’s Economy
The significant slowdown in inflation provides a sense of relief and optimism for Pakistan’s economy. Consumers can breathe a little easier, and businesses may find it easier to plan for the future with more predictable cost structures. The lower inflation rate also opens the door for further monetary easing, which could help stimulate economic activity and support growth in key sectors like manufacturing and services.
As the SBP continues to adjust its policy rate, Pakistan could see a positive feedback loop where lower inflation supports lower interest rates, which in turn promotes investment and consumption, driving overall economic growth. With the IMF projecting inflation to average 9.5% in FY25, there is reason to be cautiously optimistic about the country’s economic outlook.
Conclusion: A Turning Point for Pakistan’s Inflation Battle
September 2024 marks a significant turning point in Pakistan’s ongoing battle with inflation. With a YoY inflation rate of 6.9%, the lowest in almost four years, the country is well within the SBP’s target range of 5-7%. The reduction in fuel and food prices has been instrumental in this achievement, and the SBP’s monetary easing has played a crucial role in stabilizing the economy.
While challenges remain, particularly in the form of global economic uncertainties, the outlook for inflation in Pakistan is far more optimistic than it was just a year ago. Policymakers now have the room to focus on growth, and if they can sustain this momentum, Pakistan could be on a path to more sustainable economic stability in the years ahead.
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