Pakistan’s consumer price inflation to ease further in February

Pakistan's Consumer Price Index (CPI) for February 2025 is expected to ease to 2.0-2.5% for February, which would be a 112-month low in headline inflation, according to reports from Topline Research and Arif Habib Limited.

In February, food inflation is expected to decline by 0.4%, driven primarily by a 55% decrease in tomato prices, a 27% drop in onion prices, and a 21% reduction in potato prices. However, prices of fresh fruits and sugar are expected to increase by 9-15%, said Shankar Talreja at Topline Research.

Housing, water, electricity, and gas segments are anticipated to see a 0.2% month-over-month decline due to an 8% decrease in LPG prices and a 0.5% reduction in electricity prices, amidst higher negative fuel cost adjustment (FCA).

The transport segment is projected to witness a 1.2% month-over-month increase due to a 2-4% rise in petrol and diesel prices.

Rao Aamir at Arif Habib Limited noted that on a monthly basis, headline inflation is projected to decrease slightly by 0.21%. This marks the lowest inflation reading since October 2015, when it stood at 1.61%.

For the first eight months of FY25, average inflation is estimated at 6.04%, a significant drop from 28% recorded during the same period in FY24.

According to Aamir, the housing index is projected to decrease by 0.3% month-over-month, primarily driven by a 1.3% drop in electricity prices.

This decline reflects a negative Fuel Cost Adjustment (FCA) of PKR 1.23/KWh for December 2024, which will be passed on in February 2025 bills, compared to a negative FCA of PKR 0.76/KWh last month.

The transport index is expected to increase by 1.1% month-over-month due to higher petrol and diesel prices. However, it remains 0.3% lower on a year-over-year basis, reflecting the high base from last year.

Central Bank has also reduced its inflation projection for FY25 to 5-7% from an earlier range of 11.5-13.5%.

The IMF has similarly revised down its inflation forecast (average) for FY25 to 9.5% from 12.7% reported earlier.

"With inflation expectations of ~2.0-2.5% for February 2025, real rates will be 950-1000 basis points, significantly higher than Pakistan’s historic average of 200-300 basis points," Talreja added.

"However, based on FY26 inflation estimates of 8-9%, the real rates are 300-400 basis points positive."

Looking ahead, Talreja believes the central bank has room to cut the policy rate by 100 basis points based on average FY26 inflation estimates.

However, given the upcoming IMF review and budget for FY26, the State Bank of Pakistan may pause the rate cut cycle until the first half of FY26.

Key risks to the inflation outlook include major deviations in commodity prices from current levels, such as oil at US$75 per barrel. If global commodity and energy prices remain stable and the PKR continues to hold steady, it will provide further support to the inflation outlook, keeping price pressures contained.