As expected, the inflation is tapering off, due to high base effect and softening global commodity prices. Yearly CPI recorded at 29.4 percent in June 2023 as compared to the peaking number of 38 percent in the previous month. FY23 full year average inflation stood at 29.2 percent (second highest ever in the history of Pakistan, after the recording of 30.0 percent in FY74) as compared to 12.2 percent in FY22. The worst is perhaps behind us.
What differentiates FY23 from the previous similar high inflation period of FY74 and FY75 is negative GDP growth which averaged at positive 5.5 percent in FY73 and FY74, and it’s in negative in FY23. The impact of stagflation is much deeper.
Last year was perhaps the worst in the history of the country in terms of fall in the real income. The food inflation in FY23 stood at 39 percent. It is the highest in the history of Pakistan, as it broke the record of 34.8 percent in FY74. To give perspective of food inflation, the prices doubled in the last thirty-eight months.
Anyhow,the decline in June 2023 inflation isnot only due to the base effect, but also due to decline in the index- as on monthly basis the inflation recorded in negative – down by 0.3 percent – first negative recording since September 2022 and fourth negative recording in the last thirty-six months.
The hit is higher for the rural community as compared to the urban. Rural inflation is recorded at 32.6 percent in FY23 while the urban rate stood at 26.9 percent. In the case of both WPI and SPI, the recordings were higher than CPI and stood at 32.8 percent and 33 percent, respectively.
The core inflation, on the other hand, remains under 20 percent and stood at 16.1 percent in FY23. It peaked at 20 percent during May 23 and slightly tapered down to 18.5 percent in June 23. The decline in core inflation is much lower than that in headline CPI, as the second round of inflationary impact is seeping in.
The recording in June 2023 is better than in the previous few months. Ona monthly basis,it declined by 0.3 percent while in June last year the monthly increase was a whopping 6.3 percent. That was the month when inflation dragon really came out – this was due to delay in passing on off energy prices to the consumers – after the prices were frozen from March 2022 by the previous political regime, and that was at the time of peaking global commodity prices – especially petroleum.
That high push in a month dragged the index high for the next 11 months, and now finally, it is cooling down. The inflation is likely to remain higher than 20 percent till January 2024 and is expected to decline further to 10 percent by the year end in June, provided the currency does not slip further and the global commodity prices do not reverse the direction. And if everything remains in control, we may finally see 5-7 percent SBP’s medium term inflation target in FY25.
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