Pakistan's short-term inflation declines for second consecutive week

Pakistan's short-term inflation decreased for the second consecutive week, dropping by 0.65% for the period ending January 9.

According to Pakistan Bureau of Statistics, significant price reductions were observed in tomatoes (31%), potatoes (10%), eggs (6%), pulse gram (2%), and onions (1%).

Conversely, prices increased for pulse moong (2.56%), cooking oil (1.56%), sugar (1.23%), chicken (0.80%), vegetable ghee (0.61%), and bread (0.57%).

On a yearly basis, Pakistan's weekly Sensitive Price Indicator (SPI) recorded a 1.9% increase, the lowest in six years.

Over the past year, notable price hikes were seen in ladies' sandals (75.09%), potatoes (58.76%), pulse gram (42.11%), pulse moong (34.15%), powdered milk (25.76%), beef (23.75%), garlic (18.43%), gas charges for Q1 (15.52%), vegetable ghee (15.48%), cooked daal (15.10%), shirting (14.36%), and firewood (12.89%).

Major price decreases were observed in onions (36.25%), wheat flour (36.17%), eggs (24.07%), electricity charges for Q1 (18.11%), diesel (6.39%), bread (5.48%), and petrol (5.45%).

Inflation in Pakistan is showing a significant downward trend, with headline inflation projected to ease to 3.06% in January 2025, marking the lowest level in nearly nine years.

This follows a year-on-year inflation rate of 4.1% in December 2024, which was already an 80-month low. For context, inflation was a staggering 29.7% during the same period last year.

Analysts predict that inflation will remain below 5% through April 2025, driven by a favorable base effect.

However, a reversal in this downward trend is likely in May and June, with inflation projections rising to 8.81% and 8.97%, respectively, as the base effect dissipates after the first quarter of 2025.

The sharp decline in inflation is attributed to several key factors, including the high base effect, stability of the Pakistani rupee against the U.S. dollar, and subdued prices in the food and energy sectors.

Average headline inflation is now forecasted to be around 6.5%, with a further rise to 9-10% in fiscal year 2026.

The real interest rate is projected to reach 9.98% in January 2025, significantly higher than its historical average of approximately 2.5%.

Additionally, the historical spread between the policy rate and core inflation has averaged around 1.7% over the past nine years.

These indicators suggest that the State Bank of Pakistan (SBP) has substantial room for further rate adjustments.

It is expected that SBP may cut interest rates by 100 basis points in the upcoming monetary policy statement.

This cautious approach is driven by analysts' observations that the country's imports have risen to a 27-month high, while the current account, which has been in surplus for months, is now narrowing down and may turn negative.