Pakistan’s inflation jumps to 3.5% in May as base effects fade

Pakistan’s inflation rate rose sharply to 3.5% year-on-year in May, up from just 0.3% in April, as the impact of last year’s high base faded, according to data released Monday by the Pakistan Bureau of Statistics (PBS).

The latest Consumer Price Index (CPI) reading marks a significant slowdown from May 2024, when inflation stood at 11.8%. Over the first 11 months of the current fiscal year, average inflation was 4.61%, a steep decline from 24.52% during the same period last year.

Analysts attributed the month-on-month jump primarily to the dissipation of favorable base effects rather than new price pressures. Food inflation eased slightly, while the housing index declined due to a quarterly tariff adjustment (QTA) in utility prices.

On a monthly basis, urban CPI inflation edged up 0.1% in May after a 0.7% drop in April. Year-on-year urban inflation climbed to 3.5%, compared to 0.5% the previous month and 14.3% in May 2024. Rural inflation increased 3.4% annually but fell 0.5% month-on-month.

The Sensitive Price Indicator (SPI), which tracks essential goods, declined 0.6% year-on-year, while the Wholesale Price Index (WPI) posted a modest 0.4% annual increase after a 2.2% drop in April.

Economists warn that upcoming fiscal measures in the federal budget could influence inflation trends. Potential revenue-raising steps—such as higher general sales tax (GST), increased federal excise duties (FED) on food items, or new taxes on petroleum products—may push prices upward.

Global commodity prices will also play a key role in keeping inflation within the State Bank of Pakistan’s (SBP) medium-term target range of 5%-7%. If current trends hold and no major shocks occur, analysts project average inflation of around 6.4% for fiscal year 2026.

With headline inflation now within the central bank’s target band and core inflation stabilizing near 9%, some experts suggest room for a policy rate cut. However, after an aggressive 11 percentage-point reduction over the past year, the SBP may pause at its next Monetary Policy Committee meeting, scheduled shortly after the budget announcement.

"The SBP will likely wait to assess the budget’s inflationary impact before making further adjustments," said an analyst at Insight Securities.