Inflation plummets, but pain persists

Inflation continues its downward trajectory, with the headline number dropping to a nine-year low of 1.5 percent in February 2025. It is expected to fall even further, possibly below 1 percent in March. However, despite the sharp decline, consumers are not feeling the ease, as the erosion of purchasing power will take much longer to recover.

The numbers tell a striking story—CPI has plummeted from a peak of 38 percent in May 2023 to just 1.5 percent in March 2025. If the Shahbaz Sharif government seeks credit for achieving multi-year low inflation, it must also acknowledge its role in presiding over the highest inflation in history. The reality is that poor macroeconomic policies, coupled with a global commodity Supercycle, were responsible for skyrocketing inflation. Conversely, better economic management during the caretaker government and a global decline in prices have led to the current downward trend.

Part of this decline can be attributed to the base effect, which is expected to complete its cycle next month. Inflation is projected to bottom out below 1 percent in March, after which it will likely rise again—though hopefully remaining in single digits.

February’s inflation figures came in even lower than analysts had anticipated, as many forecast it to hover around 2 percent. The CPI index fell by 0.8 percent month-on-month, primarily driven by food prices, which declined by 4.5 percent year-on-year and 2.65 percent month-on-month.

Perishable food items saw a steep drop, falling 20.3 percent year-on-year and 16 percent in Feb-25 compared to Jan-25. Some of the most notable month-on-month declines included tomatoes (down 56.8 percent), onions (31.5 percent), potatoes (20.1 percent), fresh vegetables (16.7 percent), and eggs (14.2 percent). Prices for these items tend to be highly volatile and could move in either direction over time.

A more sustained and durable price decline has been observed in non-perishable food items, such as wheat and wheat flour, which have fallen 34 to 36 percent compared to the previous year. This decline is largely due to the absence of wheat support prices and increased imports amid declining international prices. While this has helped tame food inflation, it has also contributed to the deterioration of the farm economy, which continues to weigh on overall economic growth and employment generation.

Beyond food, energy prices have also declined, benefiting from lower international commodity prices and a stable currency. The housing and utility sub-index dropped by 0.3 percent year-on-year, with electricity charges falling by 16.6 percent and motor fuel prices declining by 5.1 percent. These factors have contributed to the continuous decline in food and energy prices over the past 12 months.

However, not all inflation components are falling at the same pace. Core inflation (which excludes food and energy) peaked at 22.7 percent on May 23 and has now fallen to 8.85 percent on Feb-25. The number remained unchanged from the previous month, indicating that core inflation may have bottomed out.

Many, especially the middle class, continue to feel the pinch, as their expenses on health (15.5 percent), clothing and footwear (15.2 percent), and miscellaneous items (11.1 percent) remain in double digits. In rural areas, education inflation stood at 24.5 percent last month, further exacerbating financial strain.

Not all segments of the economy are experiencing lower inflation. In areas where demand remains high and economic growth is stronger; inflation is still persistent. For instance, in 1QFY25, the top-performing service sub-sector was accommodation services, where urban prices surged 5 percent within a single month.

This trend suggests that inflation remains sticky or even rising in high-demand sectors. With interest rates reduced by 10 percent across six policy reviews, demand is expected to increase in more areas, which could bring inflation back up. However, poor farm economics continue to act as a natural check on both demand and inflation.

Considering 8MFY25 inflation at 5.9 percent and subdued rural demand, there is some room for further monetary easing. However, the SBP must carefully assess the lagging impact of monetary policy, as signs of shifting consumer behavior in urban areas suggest inflationary pressures could re-emerge.